A long-term strategy focused on well-established, high-quality stocks will help your portfolio lower any risk associated with politics and investing decisions based on politics

The market is always at risk of a sharp downward turn, due to its random reaction to the many outside influences that affect it. To succeed as an investor, you have to learn to live with that risk.

Politics is one example of a possible risk. Here’s a look at politics and investing, and how it might affect your investing strategy.

Invest in your Financial Future for FREE Learn everything you need to know in '9 Secrets of Successful Wealth Management' for FREE from The Successful Investor. Secrets of Successful Wealth Management: 9 steps to the life you've always wanted, before and after retirement.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Politics and investing: Conditions change during a presidential term

A U.S. election year stock market tends to go on an above-average rise.

Additionally, U.S. presidents tend to get a lot friendlier toward business and investors in the second half of each four-year U.S. Presidential term. Stocks usually (but not always) rise in response.

Presidents naturally want to win election for themselves, or their preferred successor. They also want to bolster the prospects of their political party. To do that, they have to win favour with voters. It’s especially crucial for them to charm investors into buying stocks in the second half of the Presidential term.

Rising stock prices help fuel greater consumer spending, which spurs the economy to faster growth. Rising stocks also spur capital spending and hiring, which creates jobs. That’s why a rising stock market tends to make everybody happy.

What happens in politics and investing during an election year

Before you base an investment decision on the election-year stock market rule or any market indicator, you should consider its underlying rationale. See if that rationale makes sense under current conditions.

The election-year rule worked in the past because the president and other incumbents took steps to please a large block of voters: those who want to see rising stock markets, rising incomes, and expanding job opportunities.

An historical look at U.S. presidents and market movements

An investor recently sent me a copy of a 2014 research study that compared the performance of the stock market under U.S. presidents since World War II, starting with Democrat Harry Truman (president from 1949 through 1953, 69.3% total return in his 4-year term). The study aimed to see if the market performs better under a Republican or Democratic president.

I then came across a similar study that went back to Republican Herbert Hoover (President 1929 through 1933; 77.09% total loss in his 4-year term).

The average total return during terms under a Republican president was 16.61% (1.71% yearly); under a Democratic president, the average gain was 57.44% for each 4-year term (10.83% yearly).

However, statisticians say there is no clear advantage under presidents from either party. That’s because of the large random skew in total returns during past 4-year presidential terms. For one thing, Democratic presidents happened to spend their first term in office during the three most profitable 4-year terms: Franklin D. Roosevelt’s first term (1933-1937—total return of 205.48%); William J. Clinton first term (1993-1997—total return of 97.85%); Barack Obama’s first term (2009-2013—total return of 90.7%).

Any successful investor can tell you it’s a mistake to base investment decisions on any one factor, even something as important as the party membership of the U.S. President.

Even if both political parties were absolutely consistent in their politics for decades, it would still be foolish to overlook the varied events that take place outside the White House in every term, largely out of a president’s control: wars, economic booms and recessions, changes in international monetary conditions, or changes in commodity prices and availability.

Politics and investing: A long-term investment strategy for any point in time

But high-quality dividend-paying stocks offer higher current returns than most fixed-return investments. These stocks also provide a hedge against inflation. This combination gives investors a strong incentive to hang on to their stocks as long-term investments. It gives them an incentive to buy more stocks when prices drop.

Instead of moving between extremes of risk, we continue to think investors will profit most—and with the least risk—by buying shares of well-established companies with strong business prospects and strong positions in healthy industries.

That’s not to say that there won’t be surprises that affect every company in a particular industry. But well-established, safety-conscious stocks have the asset size and the financial clout—including solid balance sheets and strong cash flow—to weather market downturns or changing industry conditions.

How can political views expressed by companies and its management impact stock prices?

What role do politics play in your investment strategy?