Investors often scrutinize stock market performance after major events seeking patterns to inform their strategies. In the last twelve months we have seen two significant events in the U.S. that will impact stock markets around the world in the next 12 months.
There was the U.S. presidential election and a year of strong capital growth.
Historical data suggests that attempting to predict market movements based on these events is unreliable. Instead, a consistent, long-term investment approach, coupled with diversification, proves more effective in achieving financial goals.
Historical Trends Post-Presidential Elections
The stock market’s behavior following presidential elections varies. While some elections lead to market rallies due to anticipated policy changes, others result in volatility stemming from uncertainty.
For instance, after the recent 2024 election, U.S. equity markets experienced record inflows, with $149 billion directed into U.S. equity ETFs in November alone.
This surge was attributed to the removal of market uncertainties and expectations of favourable economic policies. Over the next twleve months markets will of course react to how much of this uncertainty has actually been removed or not.
Stock Market Performance Following Significant Growth Years
Years with substantial market gains, such as a 30% increase, often lead investors to anticipate a subsequent downturn.
However, historical analysis indicates that strong performance does not necessarily predict a decline. Yet this is what I have been hearing a lot from clients in recent weeks, surely the market can’t climb any further!
The average return following a 30% gain is approximately 10%, aligning with typical market expectations.
This demonstrates that markets can continue to perform well after significant growth periods. Which leads to the question of timing the market…
The Pitfalls of Market Timing
Attempting to time the market by predicting optimal entry and exit points is fraught with challenges.
Even seasoned investors find it difficult to consistently forecast market movements. This is why being consistent is far more important than trying to be ‘right’.
Waiting for the “perfect” moment can result in missed opportunities, especially during periods of rapid growth. Think of all the commentators at the start of the year who were suggesting the market was going to crash, or fall significantly, where are they now?
And these missed opportunities lead to an erosion of your mindset, on top of the missed capital gains.
The Cost of Seeking Certainty
The desire for certainty can lead to inaction, which carries its own risks.
By staying on the sidelines, investors will forgo the benefits of compounding returns and market appreciation. Over time, this hesitation can significantly impact portfolio growth, underscoring the importance of consistent investment practices.
Because we know that the supercharge for compounding is time.
I had some thoughts on this concept with my co-host on Investment Insights recently here.
The Importance of Consistent Investing and Diversification
Adopting a disciplined, consistent investment strategy, such as dollar-cost averaging, allows investors to mitigate the effects of volatility and avoid the pitfalls of market timing.
Regular investments, regardless of market conditions, enable participation in the market’s long-term upward trajectory.
Additionally, maintaining a diversified portfolio across various asset classes—such as stocks, bonds, and real estate—reduces risk and enhances potential returns.
Diversification ensures that poor performance in one area does not disproportionately affect the entire portfolio. You can check out more of my thoughts on the concept of diversification here.
Conclusion
While it’s natural to seek patterns in stock market performance after a U.S. presidential election and a year of strong growth, historical data suggests that while the reliability of the predictions may not be great, the good news is that there could well be more growth ahead.
So, attempting to time the market in the next 12 months could be a fools game.
Instead, embrace a consistent, long-term investment strategy, complemented by a diversified portfolio.
This is the most effective approach to achieving financial freedom and realising one’s desired lifestyle.