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US election 2016: Sit tight, whatever the outcome

Glenn Freeman  |  08 Nov 2016Text size  Decrease  Increase  |  

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Hold firm to your self-managed super fund's long-term investment strategy and don't be unduly influenced by doomsday predictions ahead of the US election.

 

The most successful investment strategies are those played out over the long term--it's a common sentiment, but one that can be difficult to put into practice during periods of market volatility and events that provoke great uncertainty.

Like now.

With US voters entering the polls today, those of us in Australia should learn the identity of the 44th President of the United States some time on Wednesday.

The long process of primary elections, nominating conventions and campaigning that defines the US presidential election process has dominated news feeds around the world for many months now.

Without going into specific examples, this campaign has been a particularly bitter battle, and one that has repeatedly defied pollsters' predictions--particularly in the latter stages.

Of course, the reality is that no one knows the outcome until after the votes are counted. Likewise, financial markets--both in the US and around the world--won't absorb the full impact of the new President until well after he or she is inaugurated.

Have a plan and stick to it

At times like this, the best defence against market volatility is a clearly defined, well-rounded and long-term investment strategy, says Andrea Slattery, managing director and CEO of the SMSF Association.

"In the short term, the US election result, particularly if the Republican candidate, Donald Trump, is elected, is likely to increase market uncertainty and that may have a negative impact on the value of trustees' SMSF portfolios," Slattery says.

"But over the longer term, it will be much more difficult to predict how either a Trump or Hillary Clinton presidency will affect economies and shape financial markets around the globe, which is why it is critical trustees adhere to their long-term investment strategies and don't have a kneejerk reaction to the election."

She reminds SMSF trustees that they are legally required to have an investment strategy, and believes the pronounced volatility around the US election highlights the very reason this is mandated by Australian legislation.

"Your investment strategy is your best friend to guide your fund through uncertain times--such as the ones we could face post the US election," Slattery says.

Careful consideration of the diversity of your SMSF assets is a key part of such a strategy.

"Diversification of your retirement savings across different assets and regions is a key in protecting your fund from volatile financial markets over the long term," she says.

"Although it is important to keep track of events that affect financial markets and your retirement savings, it is important to remember that superannuation is for the long term and that sometimes short-term decisions can do more harm than good."

Slattery believes a good investment strategy that keeps you disciplined and focused on the long term is essential.

The Brexit vote of 23 June 2016 is the most prominent and comparable event to the US election in recent times, one which had an "immediate and momentous impact on financial markets across the globe".

"The UK leaving the EU was rightly portrayed as being one of the most significant political events in recent years, having implications for the UK and European economics as well as the broader global economy," Slattery says.

"But post Brexit the markets have settled down. Indeed, some economists and market commentators are seeing some positives in the UK's decision to leave the EU. In the same vein, SMSF trustees should not make any hasty decisions post the US presidential election."

Whatever happens, equity markets will recover

According to George Lucas, managing director of Instreet Investment, the market is expecting a sell-off of between 5 per cent and 10 per cent, "as a knee jerk reaction, but with a  Brexit-style recovery afterwards".

On the flipside, he says a Clinton win could see the US market easily recover the 3 per cent it has already lost--though this also depends on who wins the Senate and the House.

Lucas also believes the US Federal Reserve will raise official interest rates, regardless of the election outcome.

"Even if Trump wins the election this week, there will be little excuse for the US Federal Reserve (Fed) not to hike interest rates in December following strong recent data," he says.

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Glenn Freeman is a Morningstar senior editor.

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