How Different Investor Personas Might Behave Ahead Of Presidential Elections

As the U.S. presidential election approaches, many investors start to feel the tension and uncertainty that often accompanies these events. Leading up to elections, investors often speculate on how the outcomes could influence the economy and, consequently, their investments. As investors react to polls, debates, and news reports, speculation can lead to market volatility - a normal part of any liquid, well-functioning market that incorporates new information into prices. Understanding how certain investors might behave ahead of elections can help advisors better guide clients and maintain a steady investment strategy.

Investor Behavior Based On Personas

The lead-up to a presidential election can more acutely affect specific investor personas, particularly those who are very focused on their portfolio details or highly motivated by personal values.

Those focused on details pay close attention to performance and may be more inclined to make changes based on what they perceive as important new information. Some of these kinds of investors may try to time the market based on expected election outcomes, leading to higher trading volumes and volatility. In fact, trading volumes in the U.S. equity markets increase by an average of 24% in the six months leading up to presidential elections, according to a study by J.P. Morgan.

Investors might also flock to assets perceived as safer, such as gold or government bonds. For example, investments in gold ETFs increased by 18% in the three months before the 2016 election, according to a Bloomberg report. 

Within Seeds, those personas focused on the details would include:

• ‍Private Investigator (PI)
• Score Keeper (SK)
• Complex Contrarian (CC)

In addition to those most focused on the details, investors motivated by personal values may be more inclined to react based on a particular political ideology. For instance, those concerned that the candidate of their opposing party may win might make changes to their portfolios. A survey by the American Economic Association found that investors with strong political views are more likely to alter their investment strategies based on their expectations of election outcomes. 

Investors might also increasingly move their money into sectors that align with their value and that they believe will benefit from the policies of the potential election winners, such as renewable energy or defense. For example, investments in renewable energy stocks notably increased leading up to the 2020 election, with the iShares Global Clean Energy ETF rising 40% in the six months prior, according to MarketWatch data. 

Within Seeds, those personas focused on values would include:

• Change Maker (CM)
• Effects Causer (EC)
• Complex Contrarian (CC)

As you can see, the Complex Contrarian persona falls into both categories (highly motivated by values and focused on the details). Advisors might consider that this overlap could imply that Complex Contrarians may be at heightened risk of wanting to take action ahead of an election. 

Remembering Historical Market Reactions

Since these personas may feel motivated to make changes to portfolios, your role is crucial in helping clients navigate the uncertainties of election periods. Here are some strategies to guide your clients effectively:

1. Proactive Communication: Proactively reach out to these personas to help reduce anxiety. Consider putting the upcoming election in historical context and sharing statistics, like the fact that the S&P 500 Index has posted positive returns in 19 of the 23 presidential election years from 1928 through 2020, with an average return of about 7.1%, according to a study by Fidelity.‍
2. Focus on Long-Term Goals: Consider reminding clients of their long-term investment goals and the importance of staying the course. Also include statistics, like the fact that investors who stayed fully invested in the S&P 500 during the 20 years, including multiple election cycles (2000-2020), had an average annual return of 6.06%, while those who missed the best 10 days had an annual return of only 2.44%, according to a Charles Schwab study.‍
3. Diversification: Consider ensuring clients’ portfolios are well-diversified to mitigate risks associated with election-induced volatility or point back to their assessed risk target and how you’ve already built a diversified portfolio intended to weather different market conditions more effectively.‍
4. Behavioral Coaching: Advisors can help clients avoid making impulsive decisions by discussing the psychological aspects of investing, such as the tendency to overreact to short-term events. By understanding their specific persona, you can shape your conversations around how they might be thinking about the election

Elections can undoubtedly introduce a degree of uncertainty and volatility into financial markets. However, by understanding historical trends and maintaining a disciplined, long-term approach, advisors can help clients avoid making rash decisions that could jeopardize their financial goals.

Financial advisors are instrumental in guiding clients through these tumultuous periods, helping them to stay focused on their long-term objectives and make informed, rational decisions. By combining education, clear communication, and a well-thought-out investment strategy, you can help clients navigate the complexities of election cycles with confidence and poise.

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If you have any questions or wish to discuss this topic further, please reach out through hello@seedsinvestor.com!

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Seeds Customer Tip:

To identify your Complex Contrarian clients, click the “Filters” button at the top right of the Seeds Household List and expand the Mindset section