2020 has been a train wreck so far to say the least. Added to all the chaos of 2020, this year is also an election year, which could have a large impact on your finances. The stock market tends to behave a certain way in election years. Depending on who gets elected, there could be huge tax implications on your income and your investments. Added to all of this is the black swan event of the coronavirus and unemployment, Congressional gridlock, trade wars, and businesses failing to survive the pandemic. Familiarizing yourself with how an election year can influence your finances will help you come out of 2020 as strong as possible financially.
Historically the stock market performs well in an election year, even more so if the incumbent is running for a second term. Aside from the 30% drop and quick recovery we experienced in March, this year has been surprisingly robust for the stock market, especially considering the conditions of the pandemic. However, when we experienced the 30% drop, many people were caught off guard and lost a lot of money. Yes it rebounded very quickly, but we are not guaranteed a rebound the next time. If you lose 30% of your portfolio you may have to delay retirement for several years or cut back some living expenses to make your budget work. It’s best to be prepared for market events like this by having a well-diversified portfolio of stocks, bonds, and mutual funds. If you have a lot of stock in one company, such as stock awarded to you from your employer or you have multiple retirement accounts from former employers, now would be a good time to diversify and consolidate your accounts into one account.
If a new administration takes over in January, then they will seek to repeal much of the Tax Cuts and Jobs Act of 2017 which means increased income and capital gains taxes across the board. This means that you should take advantage of tax strategies during the tax year 2020 and plan for new tax strategies going forward. Deferring your income by contributing money to your 401(k) or traditional IRA will help you pay less income taxes. You can also invest monies in your brokerage account in tax-free investments such as municipal bonds.
You can’t control who wins the election or what will happen to the economy and the stock market, but you can control your finances going forward. Regardless of how the election pans out it is important for you to practice these three things.
- Continue making monthly contributions to your retirement accounts.
- Diversify your accounts to protect your downside risk.
- Get a tax-minimization strategy in place.
If you’d like any more clarification on these issues or helping building a portfolio with better downside protection, I’m happy to help.