Emotions tend to run high during election years, and it’s not uncommon for investors to let those emotions influence how they position their portfolios. In fact, our 2023 Investor Survey found that 78% of mass affluent and high-net-worth investors were concerned about how the 2024 U.S. presidential election will play out. That concern led to pessimism regarding how the markets would perform over the next 12 months.

Not surprisingly, based on conversations we’ve been having with advisors recently, the upcoming election remains a top concern for investors this year. These concerns indicate that investors believe the election will have an impact on market performance. But do elections really impact financial markets?

I provided an answer to that question last year by comparing market performance in election and non-election years from 1937 to 2023. Janus Henderson Portfolio Manager Marc Pinto and Research Analyst Chris Benway recently updated those figures through mid-June 2024 and offered their ideas on how the election could affect certain sectors.

And the short answer is that, yes, there are differences in market performance in election versus non-election years. However, in our view, they are not so significant that investors should make wholesale changes to their portfolios or financial plans.

All this data can help put things in perspective, and it may help investors see the value of long-term investing. But it’s also important for advisors to remember that elections and investing are emotional subjects. Because of this, it’s crucial to remember that we can’t educate away the emotions of our clients. What I mean by that is, a chart or series of numbers, which are inherently emotion-less, may not do much to overcome an investor’s strong, long-held, highly personal feelings – no matter how irrefutable the data may be.

Using MINDSPACE to help manage investor emotions

While we can’t completely educate away emotions with data, I do think we can help keep investors focused on their long-term goals through data AND some helpful behavioral tactics.

In the past, we’ve recommended the use of the MINDSPACE framework to help “nudge” clients in the right direction on that front.¹

Using some of the key concepts from the framework, I’ll provide a few ideas specifically related to managing clients’ emotions around the upcoming election.

Norms: We are strongly influenced by what others do. Because of this, it may be helpful to provide a particularly emotional client with some context about what others are doing – specifically, most of your other clients. For example, simply saying, “While each client situation is different, most of our clients are staying the course.” Along with that, you could cite anonymous examples from conversations you’ve had with clients who feel similarly.

Defaults: We like pre-set options, which in this case is doing nothing or simply staying the course. To appeal to this tendency, you could coach a client who is contemplating an emotionally driven investment decision by saying: “I understand the urge to sell, but don’t forget you have to be right twice: Once when you sell and again to reenter the market. For that reason, I would recommend we stick with our agreed-upon plan and allow this election cycle to play out.”

You could supplement this conversation by asking a client who is sure the market will go down to tell you when they think the market will drop, how the S&P 500^® Index will perform compared to another index, or other specifics about their beliefs. These questions may shake their confidence just enough for them to see the value in staying the course.

Salience: We have limited attention spans and therefore are drawn only to things that are relevant to us. For example, you might remind a client that their baseline is not how the market performs leading up to and directly after the 2024 election, but rather whether they are still on track to meet their financial objectives.

Another topic that is incredibly salient to clients is taxes. In this case, you might estimate the tax bill that would result from making a significant change to the client’s allocation due to concerns about market performance during the election.

Commitments: We seek to be consistent with our promises. Given that tendency, one final idea would be to kick the proverbial can down the road by saying: “Can we agree that we will revisit your entire financial plan before making any wholesale changes to your investments?” This commitment puts space between the emotional present and a hopefully more rational point in the future. One thing to note is that it’s important to understand what may happen between now and then. I’ll discuss that in a future article.

Client conversations during election season can be challenging. The 24-hour news cycle may make it difficult for advisors and clients to see the forest for the trees. However, a combination of black-and-white data and emotionally sensitive conversations can help all of us navigate our personal paths forward without letting the election lead us off course.