Advocacy groups are on track to spend about USD 10.8 billion on political advertising in the 2020 election, an increase of about 50% from the expenditures recorded four years ago.1 Regardless of the political party or interest group behind them, the ads are all designed to pull on your heart strings, ramp up your anxiety, and drive home one central point: This election matters.
Of course, all elections do matter, and investors should review their financial plans periodically in light of changes to tax policy. However, we are compelled to remind investors that the outcome of this election is unlikely to have a meaningful impact on your investment success over the longer term—unless you overreact to the results. We discussed the importance of insulating your political views from your efforts to construct a durable portfolio in “Keep your politics out of your portfolio ,” and it’s worth revisiting the topic in the final weeks of this campaign.
There is ample academic research to support the belief that political affiliation has a direct impact on one’s level of optimism regarding the future direction of the economy. Investors who share an affiliation with the victorious political party are more likely to accept greater risk and earn correspondingly higher returns. They also are more likely to believe that financial assets are undervalued and respond accordingly by increasing their allocation to equities. Conversely, investors disappointed with the outcome of an election often adopt an abrupt risk-off strategy. This type of partisan bias can suppress investment returns.2
The balance of power within the US federal government is just one of many variables that affect the economy and global financial markets. Efforts to determine which political party is better for markets often runs aground on disagreements over what time series is appropriate. Do you start before or after the Great Depression? Do you include the nadir of the economic recession in 2008 or exclude it? Putting aside the fact that the sample set is too small to be statistically significant, such debates ignore the impact of broader forces in the economy such as digitization, climate change, and demographics. As we discuss in “The (flimsy) link between US politics and market returns,” correlation is not causation. Elections matter, but their impact on markets is more muted than the political ads would have you believe.
That being said, there are some proposed policy changes that are worthy of close attention. To help put the election into an objective context—and ensure that you are well positioned regardless of the election outcome—we recommend thinking about your wealth through the UBS Wealth Way, which comprises three specific strategies: a Liquidity strategy, to help protect your lifestyle; a Longevity strategy, to help achieve your lifetime goals; and a Legacy strategy, to help impact the lives of others.
Segmenting your wealth into these strategies can help you align your financial resources with your goals, leading to the right balance between risk management and potential wealth accumulation for your family’s objectives. Viewed through this lens, there are two steps that we advise you to discuss with your financial advisor in the coming weeks:
1. Secure your Liquidity strategy.
The Liquidity strategy consists of resources earmarked to help you meet your short-term cash flow needs. By setting aside 3-5 years of cash flow needs in cash, bonds, and safe borrowing capacity, you can ensure that your spending needs can be met—and that your Longevity strategy assets can remain invested for long-term growth—even in the unlikely event of an extended bear market after the election.
2. Fund your Legacy strategy.
Today, a married couple can give away USD 23.16 million to others without triggering gift or estate taxes, which have a top tax rate of 40% for amounts over USD 1 million. In a Blue Wave scenario, this lifetime exemption amount is likely to fall significantly, perhaps as low as USD 7 million.
Such a policy change could become effective on 1 January 2021, and shave as much as USD 6.5 million off of a family’s after-tax wealth, leaving less capital for the next generation or for charitable purposes. Accelerating gifts into 2020 could increase the amount you can pass on, leaving more capital to devote to philanthropy. For more details, please see Modern Retirement Monthly, “2020 tax planning for retirees.”