Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The election is right around the corner. Should investors be thinking about making any changes to their portfolios as a result? Joining me here today to explore the topic is Christine Benz. Christine is Morningstar's Director of Personal Finance.

Christine, thanks for being here today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Oftentimes when people talk about elections, they talk about how well the stock market has historically performed under a Democratic administration or Republican administration. Is that something worth doing, exploring that question?

Benz: Well probably not. Because when you look at the data on how the market has performed in various regimes, what you see is that the data are all over the map in terms of whether the market tends to perform well under Republican presidents or Democratic presidents. So I wouldn't rely on that as a gauge.

Then I think when you take an even wider view, what you have to realize is that who is president is but a small determinant of how the market behaves. Right now we're contending with some really large forces beyond politics—we've got this pandemic, we're in the midst of a recession, we still have quite high unemployment, we have very low interest rates, we have not-cheap equity valuations. So it's all mixed together in determining how the market will behave in the future. So I really think that investors shouldn't get caught up in terms of trying to position their portfolios to benefit, or potentially to protect them from one president or the other taking office.

Dziubinski: What about elections and market volatility? I mean, considering the uncertainty, is volatility something investors should be bracing themselves for?

Benz: Well, I do think that that is something investors should be thinking about. We have experienced some volatility recently in some of the technology stocks, but I do expect that we will see probably more volatility as we get closer to the election.

For one thing, when you look at the data on polling, it's really quite tight. So my guess is that whoever wins this election, there will be kind of a surprise factor. So there will be an opportunity for some dramatic ups and downs around the final outcome. But I also come back to that phrase you often hear about how the market really doesn't like uncertainty. Right now we have a lot of uncertainty and we may have uncertainty even on and after Election Day, because it sounds like it may take a while to count some of the votes coming in. So investors should brace themselves for volatility. I would expect to see more volatility in the next couple of months as we sort all of this out.

Dziubinski: So Christine, if the market goes up a lot prior to and through the election, or down a bit through that same period, investors shouldn't make too much of it?

Benz: I don't think so, because sometimes you do see these dramatic moves. If you'll remember right after President Trump was elected, we had an initial significant downdraft in the market, then it recovered. We had some strong returns for a period there and then volatility as the pandemic came on. So I wouldn't make too much of volatility in the months around the election. I would expect some of it, and it may not foretell how the market will perform over the president's whole tenure. So I wouldn't get too worked up about volatility in these coming months.

Dziubinski: So lastly then, is there really anything investors should be doing at this point with their portfolios?

Benz: I really liked the idea of bringing it back to your plan, bringing it back to the policies that you have for your plan. So I love the idea of investors working with an investment policy statement, or some kind of blueprint that guides how they position their portfolios and guides when they make changes. For a lot of investors, they've probably been fairly hands-off through their portfolios through this period. The data suggests that in fact, they have—we haven't seen investors flee from stocks, despite some of the volatility that we experienced during the first quarter. But I would say, bring it back to that plan, bring it back to your asset-allocation target.

If you have an asset-allocation target, you may in fact be wanting to trim stocks, especially if you're getting close to retirement. Similarly, many investors haven't addressed their portfolios' exposures with international stocks relative to US. Take a look at where you are in your positioning geographically, relative to your targets. Also take a look at where you stand on the value-to-growth spectrum. There's another area where many investors have been hands-off with their portfolios, all too willing to let their growth stocks drift up. Take a look at your portfolio’s positioning on a bottom-up basis and consider rebalancing back to your policy positions.
I think that that's probably the best course of action for most investors at this juncture.

Dziubinski: So let your own policy drive your portfolio even today.

Benz: Exactly.

Dziubinski: Christine, thanks so much for your time, we appreciate it.

Benz: Thank you, Susan.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.