The election’s biggest financial risk? You.

All year, you’ve been hearing the drumbeats of election news, advertisements and polls. While elections are important, sometimes the media can rile us up. So, if your emotions are running high, it’s only human.

The problem comes when you let your emotions drive your financial decisions. Financial decisions based on anxiety are never well thought out and can damage your financial future. Now, let’s talk about how to avoid that.

Do this when the election creates financial jitters 

Your best line of defense is to call your planner when you want to make an election-related decision about your plan. One of the most important things your planner can do for you is address your financial concerns with objective experience. They’ve helped guide their clients through elections and any resulting market volatility, including the times that the media has led us to believe that “this time is different.”

Still, it’s only natural to want to take action when an event sparks anxiety.

Beware of behavioral biases

Studies from the fields of psychology and economics have discovered that we suffer from built-in behavioral biases that affect how we perceive and react to risk. Even if you rationally know what’s in your best interests, there are behavioral biases that you may be susceptible to during this election.

Let’s discuss some of these biases and ways to avoid them, so you don’t become your own worst financial risk this election.

1

Behavioral bias: Narrow framing

Getting financial anxiety because the candidate you don’t favor is rising in the polls can happen to the best of us. Let’s say you believe this candidate will be harmful to your wealth when in office, so you consider changes to your financial plan. Yet, you risk derailing your goals because, after all, these are only polls. You don’t know who will win and what proposals will be implemented. 

Acting on limited data, like a snapshot in time, is a behavioral bias called narrow framing.

How to help avoid it during an election: 

• First, hit pause. We’ll say it again: Call your planner when contemplating a change to your financial plan.
• Second, remember that campaign promises hardly ever come to pass exactly as proposed. Some of the grander proposals require Congress to pass legislation. Executive orders and agency regulations have their own political, and sometimes judicial, obstacles.
• Third, polls are not votes and can change constantly. If anyone wants to bet on polls, just reference the 2016 presidential election to stop you from doing so. 

2

Behavioral bias: Overconfidence

Even if you don’t think of yourself as particularly confident when it comes to investing, that doesn’t mean you’re immune to the behavioral bias of overconfidence. Overconfidence is the conscious or unconscious sense that you have more skill or knowledge than you actually do.

How could overconfidence in investing play out this election? As an example, let’s use the candidates’ different energy policies. Maybe you’re tempted to get ahead of these policies by adjusting your portfolio, so it has the potential to benefit if one candidate wins over the other.

This means you’re confident enough in your ability to predict the election’s outcome and what the market will do in response. 

How to help avoid it during an election:

• It can be a fool’s errand to predict election outcomes, especially in a closely divided electorate. Ask yourself: Do you have data that experts don’t? It’s also practically impossible to predict market performance and how one asset class will perform year to year, be it stocks, bonds or commodities.
  
  Think of it this way: It’s impossible for you to predict markets with any certainty one year ahead even when the government isn't changing hands. Why would you think you can do it when there's the added complexity of an election?
  
• Although past performace won't guarantee future returns, the S&P 500 has posted annualized double-digit gains, on average, regardless of which party wins the White House, according to data since 1948 calculated by Edelman Financial Engines. It’s likely not worth changing your portfolio based on which candidate wins.
• Edelman Financial Engines creates portfolios that are highly diversified across asset classes and stock sectors beyond the S&P 500, so as a client, you may have exposure to asset classes and/or sectors that benefit regardless of which candidate wins.

3

Behavioral bias: Peer effects

None of us live in a vacuum. It’s hard to avoid that friend or neighbor who just loves to give financial planning tips. They may seem to have their financial plans all figured out if one candidate wins versus the other. Their confidence can be seductive – and maybe you want to do what they’re doing. This is peer effects. Don’t succumb to it.

How to help avoid it during an election:

• Remember that your finances and goals are unique to you. Your financial plan was specifically tailored to take that into account, as well as when you want to retire.
• Changing your plan based on what your peer is doing could set you behind. You worked so hard to get to where you are. Who will you blame if you change your plan based on your neighbor’s and it doesn’t work out?

4

Behavioral bias: Confirmation bias

Confirmation bias is our tendency to selectively remember events that confirm our own worldview, while ignoring events that argue against it. 

This bias is strong because it’s easier for us to believe the things that align with our beliefs – and harder to believe the things that run counter to our beliefs. So, could confirmation bias play into our response to the election? Of course. 

Let’s say the candidate that you don’t favor rolls out an economic plan that actually favors your tax situation. How open will you be to hearing about the plan and accepting its facts? If you let confirmation bias take over, you may assume that your tax situation will be worse off if the candidate wins. 

How to help avoid it during an election:

• This is a tough one. Confirmation bias can be among the most “unconscious” of biases. We’re not aware that we are exhibiting it. Perhaps knowing about it will help you be on your guard for it.
• Also, consider avoiding a news bubble by only tuning into media that has an obvious slant that agrees with yours.

You’re in control

We’re not pretending that elections can’t impact our financial lives. They can. But many other factors do as well, with the critical ones being the decisions you yourself make.

If you find yourself wanting to make changes to your finances because you’re freaking out that the election isn’t going your way, don’t. Take a breath, take a walk, talk to a friend about nonelection topics. And, most importantly, call your planner who is there to provide you with the perspective and experience needed.