2020 is going to be an interesting year. In the months leading up to the Nov. 3 elections, we can expect to be inundated with news and speculation around potential changes in leadership and policy that could influence the direction of the economy. And there could be substantial change: Along with state elections and the presidential election, all 435 House seats and roughly a third of Senate seats will be decided in November. The winners could help shape tax and spending policies, which could have far-reaching effects on economic growth, inflation—and your investments.
For investors, the key is sticking to your investment strategy, says Paul Christopher, CFA, Head of Global Market Strategy at Wells Fargo Investment Institute. “We’re still advocating keeping things diversified and balanced through a well-thought-out risk-management process,” Christopher says. “This is a time to be cautious and to avoid jumping to conclusions.”
Here, Christopher describes five important considerations that may help investors prepare for increasing uncertainty as the 2020 elections draw closer.
Focus on managing risk
Volatility tends to increase as major elections approach, as potential changes fuel uncertainty. That may especially be the case in 2020, as so many major economic and political events unfold.
No matter what happens, Christopher says, you should stick to your investment plan, stay disciplined, and focus more on managing risk, as your tolerance might shift.
“Conservative doesn’t mean defensive,” Christopher adds. “Defensive would mean being like a turtle, pulling into your shell, selling equities and going to cash. Conservative means taking better account of risk and reward. Know what’s risky, and if you’re expecting volatility, focus on addressing the things that are going to upset your stomach and keep you up at night.” (Read more about ways to invest more confidently in volatile markets.)
Consider boosting your emergency fund
Increasing your emergency fund may help ensure you don’t have to sell off investments during a downturn to meet expenses if something especially dramatic happens. Christopher suggests putting aside an amount equal to six to 12 months of expenses, depending on your risk tolerance. Do this, and you’ll be better prepared to wait for recovery, he says.
Avoid the temptation to speculate
It may be tempting to speculate on areas of the market poised to benefit from a certain party or candidate, or to hedge against a potential policy that you’re worried about. “We hear a lot of questions about, ‘What do we want to buy now in case candidate X wins next year?’” Christopher says. “We’re advising against that kind of speculation, since the number of possible congressional and presidential election outcomes is still so large and varied. Instead, stay close to your long-term allocations.”
Focus on quality
Today, Christopher suggests looking for quality in both stocks and bonds. “Election outcomes are important but still very uncertain, but we also believe that the economy is late in its expansion. That could matter more in the next year. When the end of the economic cycle does come, quality instruments may decline—but potentially not as much as other parts of the market,” he explains.
That means focusing on companies with strong cash positions, especially in the information technology, financial and consumer discretionary sectors. Dividend-paying stocks can also be an attractive way to generate income. Within fixed income, consider high-quality, investment-grade corporate bonds, municipal bonds, and preferred stocks.
Stay focused on diversifying
The yield curve inversion in the summer of 2019 raised concerns about a potential recession and, with it, the idea of boosting allocations to “safe haven” assets, including gold. Christopher says to stick to a well-balanced portfolio instead. “Loading up on one market or product potentially puts your savings at risk in one place. We consider it more risk than a long-term investor needs to take,” he says.
Instead, now may be a good opportunity to rebalance your portfolio. “A disciplined approach to pruning and then reinvesting—even as equity prices are weakening—can be a successful tool to increase return potential when political and other uncertainties create equity market swings,” Christopher says. (Learn more about the importance of rebalancing.)