The Fourth has come and gone, but we gathered some data about the finance behind the fourth of July. Check it out!
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2015-2016 Advisor Websites.
It’s a presidential election year and with that comes the invariable stock market correlations seeking to predict election results or forecast the market’s direction. On one hand, the performance of the stock market during the two months leading up to the election has been somewhat of a predictor of who will win the race. On the other hand, we try to predict the direction of the market based on who wins the election. While all of this makes for interesting and fun banter around the water cooler, thoughtful investors would be wise to leave their Ouija boards in the closet and stay focused on their long-term investment strategy. As much as we would all like to glean even a small amount of investment insight from the election year follies, it would be important to note that the stock market is essentially non-partisan, and Presidents have very little impact on the direction of the markets.
The Stock Market as an Election Predictor
Admittedly, the stock market has been fairly successful at predicting the results of Presidential elections. Since 1900, the performance of the stock market between July 31 and Election Day has correctly predicted the winner 88 percent of the time. 82% of the time when the market rallied between August and election day, the incumbent as won. 86% of the time when the market declined, the challenger won. That’s 25 out of 28 elections that the stock market has, in effect, selected our President. That is pretty remarkable on its face, and, if I were a betting person, I would have to consider those to be outstanding odds.
There is some logic behind this relationship, the idea being that a rising stock market is a reflection of the general belief by investors that the economy will be stronger in the months ahead. The gives voters a confidence boost which, in turn, boosts the chances of a win for the sitting President.
The Election as a Predictor of Market Direction
Each election year I am asked whether a win by either party will be better for the stock market. My instinctive response is, “I don’t know, and I don’t care.” Of course, I do try to explain in gentler terms that the market forces are much more powerful than any single person, even the President of the United States. With a slowing global economy and the possibility of increasing interest rates the market already has enough to absorb. Although, the uncertainty of who will guide our country for the next eight years is a contributing factor. All told, there have only been three election years of the last 21 in which the S&P 500 had a negative return.
Is the Stock Market Pro-Republican or Pro-Democrat?
If we try to apply any logic to this, we would have to surmise that the stock market should perform better with a Republican in office. After all the markets like free-enterprise, lower taxes and less regulation, right?
Try telling that to George W. Bush. The stock market lost 25 percent during his two terms as President. Of course, he had two recessions and two stock market crashes as bookends to his eight years in office.
Conversely, the best stock market performance under a two-term President was none other than Bill Clinton who actually increased taxes. It can be said though, that the stock market performed extremely well under Ronald Reagan albeit for two down years (1st and 7th years of his presidency). But now, we have Barack Obama, under whom taxes and regulations have increased significantly, and the democratic candidates are putting proposals for more tax increases are on the table. Yet, of the last five Presidents, his first-term has seen the biggest four-year return of 46.5 percent. Of course, his first term began just as the stock market hit bottom after the 2008 crash.
The final tally shows that the best stock market performances in the last 30 years have come under democratic presidents. Yet, nothing they have done while in office can be remotely linked to the performance of the stock market.
The Final Analysis:
As those who follow our investment philosophy already know, the markets are random, but they do work regardless of who is in office. Principled and disciplined long-term investors don’t invest for an election cycle, they invest for a lifetime. Vote your conscience and keep your eye on your target.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.
Investing with an eye toward promoting social, political, or environmental concerns (or at least not supporting activities you feel are harmful) doesn't mean you have to forgo pursuing a return on your money.
Socially responsible investing may allow you to further both your own economic interests and a greater good, in whatever way you define that term.
The concept of putting your money where your mouth is first gained widespread attention during the 1970s, when such highly charged political issues as the Vietnam War and apartheid in South Africa led some investors to try to prevent their money from supporting policies that were counter to their beliefs.
Since then, a wide variety of investment products, such as socially conscious mutual funds, have been developed to help people invest in ways consistent with a personal philosophy. However, individuals aren't the only ones to apply the principles behind socially responsible investing. Many colleges and universities, government pension and retirement funds, and religious groups do so to some extent.
There are many approaches to what may also be known as mission investing, double- or triple-bottom-line investing, ethical investing, socially conscious investing, green investing, sustainable investing, or impact investing.
Screening Potential Investments
This is perhaps the best-known aspect of socially responsible investing: evaluating investments based not only on their finances but on their social, environmental, and even corporate governance practices. Screens based on specific guidelines may eliminate from consideration companies whose products or actions are deemed contrary to the public good. Examples of companies that are frequently excluded from socially responsible funds are those involved with alcohol, tobacco, gambling, or defense, and those that contribute to environmental pollution or that have significant interests in countries considered to have repressive or racist governments.
However, as interest in socially responsible investing has evolved, the screening process has become increasingly positive, using screens to identify companies whose practices actively further a particular social good, such as protecting the environment or following a particular set of religious beliefs.
Both individual and institutional shareholders have become increasingly willing to pressure corporations to adopt socially responsible practices. In some cases, having a good social record may make a company more attractive to investors who might not have previously considered it.
Shareholder advocacy can involve filing shareholder resolutions on such topics as corporate governance, climate change, political contributions, environmental impact, and labor practices. Such activism got a boost when the Securities and Exchange Commission adopted the so-called "say on pay" rule as a result of the Dodd-Frank financial reforms. Companies over a certain size must allow shareholders a vote on executive pay at least once every three years. Though the vote is nonbinding, it could give institutional investors a stronger hand in advocating for other interests.
Still another approach involves directing investment capital to communities and projects that may have difficulty getting traditional financing, including nonprofit organizations. Investors provide money that is then used to support organizations that help traditionally underserved populations with challenges such as gaining access to affordable housing, finding jobs, and receiving health care. Community investing often helps not only individuals but small businesses that may operate in geographic areas that mainstream financial institutions deem too risky.
A recent development focuses on measuring and managing performance in terms of social benefit as well as investment returns. So-called "impact investing" aims not only to further a social good, but to do so in a way that maximizes efficient use of the resources involved, using business-world methods such as benchmarking to compare returns and gauge how effectively an investment fulfills its goals. In fact, some have made a case for considering impact investing an emerging alternative asset class. Impact investments are often made directly in an individual company or organization, and may involve direct mentoring of its leaders. As a result, such unique investments may be more similar to venture capital and private equity (where the concept of impact investing originated) and may not be highly correlated with traditional assets such as stocks or bonds.
Cast a Wide Net or Target Your Investments?
One of the key questions for anyone interested in socially responsible investing is whether to invest broadly or concentrate on a specific issue or area. A narrow focus could leave you overly exposed to the risks of a single industry or company, while greater diversification could weaken the impact that you might like your money to have. Even if you choose to focus on a single social issue, you may still need to decide whether to invest in a specific company or companies, or invest more broadly through a mutual fund whose objective meets your chosen criteria.
For example, as concern about the environment has grown in recent years, investing in green technology has become a prominent element in many socially responsible investing efforts. Generally, the concept (also known as "clean technology" or "cleantech") includes renewable energy (or technologies that can improve the environmental footprint of existing energy sources), clean water, and clean air, as well as technologies that can help reduce overall consumption, particularly of nonbiodegradable substances. Such a broad scope can make it difficult to choose among the myriad investment opportunities, especially if you don't have expertise about a particular field or the time or energy to acquire it. Unless you're familiar with the science behind a specific company's product or service, you might benefit from casting a wider net. Though diversification and asset allocation can't guarantee a profit or eliminate the possibility of loss, they can help you manage the amount of risk you may face from a single source.
Even if you have special knowledge of a particular field, don't let that blind you to the business fundamentals of a particular company; you still need to keep an eye on how it stacks up as a stock. Also, if you're considering a small company stock that is closely aligned with or furthers your chosen issue, don't forget that smaller companies can be extremely volatile. You also could consider investing in larger companies that have made a significant commitment to initiatives in your chosen area of interest and that might have other business advantages. Though they might not have the rapid growth potential of a small company, they often have the resources to acquire other companies, or manufacture and market globally more efficiently than a smaller company might. That might enable them to have a greater global impact while potentially offering investors a way to help mitigate the impact of smaller stocks' generally higher volatility.
If you don't have the time to do detailed research or don't trust your own judgment, you could work with an advisor who may have access to more information about your area of interest.
Know Your Goals
"Social good" may be defined differently by every investor, and even a socially responsible fund may include multiple definitions of the types of companies that meet its investment objectives.
Also, make sure your expectations are clear and realistic. Many socially responsible investments produce solid financial returns; others may not. Though past performance is no guarantee of future results, you should have a sense of what kind of return you might expect. You shouldn't feel you have to accept mediocrity in order to support your beliefs. Monitor your investment's performance, and be prepared to look elsewhere if your investment doesn't continue to meet your needs, either financially or philosophically.
The clearer you are about the goals you have for your money, the better your chances of selecting appropriate investments.
*Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund; read the prospectus carefully before investing.
**This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. Prepared by Broadridge Communication Solutions Inc. Copyright 2015