Well, history will give you almost any answer you like if you torture the data enough. And if you watch, listen, and read your preferred media sources for news coverage and commentary, you’re likely to hear the answers you seek (and may already be predisposed to believe).

The reality is that elections come and go, and things don’t tend to change too much; the status quo normally prevails. The world will continue to turn, Apple will continue to make smartphones, McDonald’s will keep using the same secret sauce on its Big Mac, and commuters will endure long lines at Starbucks to get their morning caffeine.  

That’s not to say that elections don’t have consequences—they do. But is worrying about the outcome going to change anything? And is changing your investment portfolio going to improve your ability to reach your long-term goals?

Anticipating nervous investment clients

The November 5 election will come on the heels of the most aggressive U.S. Federal Reserve tightening cycle in decades, a double-digit percentage decline in bond returns in 2022, a roller coaster equity market, and a host of geopolitical worries. It’s little wonder that consumer sentiment indexes have recently signaled nervousness leading into the election cycle.

While the media is likely to focus on the negatives and market volatility prior to the election, investors would be well advised to ignore market prognosticators. Recall that in late 2016 investors feared that Donald Trump’s presidency would lead to trade wars that would punish U.S. technology companies, in particular, due to their share of revenue and profits derived overseas, especially in Mainland China. On the other hand, Trump vowed to make America energy independent and to open up more land to drilling and fracking. Yet during his presidency, information technology was the top-performing U.S. equity sector and energy was the worst.

A similar dynamic occurred leading up to the presidency of Joe Biden. In late 2020, some observers feared that his environmental agenda would hurt the energy sector. Yet with a few months remaining in his presidency as of this writing, energy has been the top performer, outpacing the next best-performing sector by a wide margin.

With this year’s election approaching, the news media is revving up its predictions about what the potential outcomes could mean for your pocketbook and your portfolio. Suffice to say that good news doesn’t grab your attention, but dire predictions might, as suggested by the work of Daniel Kahneman, a Nobel Prize-winning behavioral economist. Kahneman developed the concept of prospect theory based on studies that showed investors experience the pain of losses at two to three times the intensity of the euphoria of gains. This asymmetry runs counter to standard finance theory, which states that investors should be largely indifferent to losses and gains in the short term as long as the expected return of the investment meets their long-term goals.

Individual investors might be wise to take a page from the institutional playbook. A major difference between individual and institutional investors is how they assess risk and build portfolios. With individual investors, we ask questions surrounding their tolerance regarding losses in the short term. If the client has a low tolerance for losses, we build a low-risk portfolio. This preference-based approach to portfolio construction is the exact opposite of the way many institutional investors build portfolios. With pension plans, for example, the funding need (the plan’s future liability) dictates the amount of risk they need to assume. In other words, the short-term need for safety is irrelevant to the pension plan manager and doesn’t drive decision-making in any material way. Herein lies the challenge for the financial professional serving the individual investor: getting them to separate their preference for short-term safety from their capacity (i.e., need) to take risks for the benefit of their long-term security. 

PAUSE is a technique designed to shift investor thinking from a short-term, emotion-based mindset to a longer-term, logic-based mindset. It relies on reframing investors’ concerns in a way that gets them to see the flawed logic of their thinking without causing offense. Below is an example that might apply to a client who calls with concerns about the upcoming election cycle and the potential impact on their portfolio.

Pause: The goal is simply to get them to slow down and take a deep breath. A simple phrase like, “Let’s take a moment to discuss together” can help get things moving more productively.

Acknowledge: The goal is to acknowledge their emotion without agreeing with their point of view. By expressing empathy, you can build trust. A comment such as, “I can see that you’ve been thinking about this quite a bit—many of my clients have expressed similar concerns” helps you stay on the same side of the table as the client.

Understand: The goal is to restate their concern but in a manner that’s more direct and to the point and force them to either agree or clarify their concern. For example: “If I’m hearing you correctly, you believe if this candidate wins the election that the market is likely to suffer a significant setback that may jeopardize your ability to reach your goals. Is that correct?”

Search: The goal is to separate plausible scenarios from probable scenarios by expanding the set of potential outcomes. Offer an alternative view, such as: “Markets have done well under both parties. There is no clear evidence one way or the other. What really matters is the resiliency of the U.S. economy and its ability to adapt. On that basis, it’s hard to bet against the market long term.”

Evaluate: The goal is to make the pivot back to a long-term focus and, specifically, the risks of adopting a short-term approach to a long-term need. For example: “Given the time we have until you retire, it doesn’t make much sense to change our approach for events that may or may not happen and won’t likely have a material impact over the long term. The bigger risk isn’t having enough when you need it most—at retirement—and having to adjust your standard of living.”

Developing the ability to shift an investor’s mode of thinking from an emotional short-term reaction to a more logical long-term outlook is a critically important skill that the financial professional brings to the relationship. Using PAUSE can encourage clients to think rationally about their investment decisions regardless of who wins come November 5. Helping investors see the difference between what’s plausible versus what’s probable can be invaluable for the success of their long-term financial goals.

The John Hancock Investment Consulting Group is here to help. The group’s veteran team of consultant analysts is dedicated to helping you enhance your investment management—through one-on-one consultations, educational programs, and our proprietary market dashboard. The group can also show you how to leverage Decision Economics, our behaviorally informed framework for investment decision-making. Through this program, we’ll help you establish a definable, defendable, and repeatable investment decision process—one that’s designed to systematically tilt the odds of success in your favor through a wide range of challenging scenarios, including emotionally charged election seasons.