Donald Trump and Your 401(k): The Effect of a Presidential Election

LAST REVIEWED Apr 23 2020 14 MIN READ

By Damian Davila

Note: Want more information specifically about the Republican tax bill about steeply decreasing 401(k) contribution limits? Click here for details and recent updates.

On November 8th, 2016, Donald J. Trump won the election to become the 45th President of the United States, and you may be wondering whether you need to adjust your 401(k) and other investments in these post-election days and months to come. This is not a political piece, but a financial one, and regardless of your political beliefs and personal reaction to the election, it’s clear that the final results came as somewhat of a surprise to many. When people and the press, especially on a national or international scale, are surprised by anything, the market is affected.

Don’t let the post-election hubbub change your plans for your hard-earned retirement savings. The markets generally had a strong first day after the election results, so keep in mind that everything is still in flux. Before you start firing up trades, let’s review how the end of a polarizing election cycle will affect financial markets, what to keep an eye on in your investment portfolio, and how you can plan for the future in a financially sound way.

The big picture: Focus on the long term health of your investments

The price of investments depends heavily on the outlook that investors have on the future performance of those investments. “Public sentiment” is a hard thing to quantify, but it does have a concrete effect.

While many pundits and investors expected the prices of U.S. equities to plunge as a Trump presidency became more likely (and those prices did take a small dip on the early hours of trading of Wednesday!), most U.S. stocks ended up having a strong day. At closing time, the S&P 500 index, the Dow Jones Industrial Average, and the Nasdaq composite index were up 1.11%, 1.40%, and 1.11% from the day before, respectively.

The key reason that U.S. equities were able to stay steady is that the consensus among economists is that the U.S. economy remains vital to the rest of the world. The U.S. was and is expected to continue to have moderate growth, regardless of whether we ended up with a President Clinton or President Trump for 4 or even 8 years. Remember that you’ll probably be holding your 401(k) and most of your other investments for a much longer period than that.

Should I sell my U.S. stocks and bonds?

Should you sell your U.S. stocks and bonds in favor of international stocks and bonds, or even just cash it all out? There are two reasons why the answer is a clear no.

First, let’s put things into perspective with the performance of three different domestic American investments throughout three different periods:

Returns on domestic funds over time:S&P 500 Index3-month Treasury Bill10-year Treasury Bond
1928 – 201511.41%3.49%5.23%
1966 – 201511.01%4.97%7.12%
2006 – 20159.03%1.16%5.16%

Source: Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University.

Whether your holding period is 10, 50, or over 80 years long, historical returns have proved that an investment in U.S. equities and bonds pays off. No matter the drama of any election season, don’t forget this wise investment maxim: “the four most dangerous words in investing are ‘This time it’s different.’”

To realize these types of historical returns you must hold on your investments for a long period of time. That’s why you can’t just start selling off your current holdings at the drop of a hat.

Second, if you were to cash out your investments and put them into the bank, you’ll lose money. Take a look at some of the November 6, 2016 savings rates data from the Federal Deposit Insurance Corporation (FDIC) for deposits under $100,000:

Savings VehicleNational RateRate Cap
Savings0.06%0.81%
Interest Checking0.04%0.79%
Money Market0.08%0.83%
3-month CD0.06%0.81%
24-month CD0.36%1.11%
60-month CD0.78%1.53%

The latest U.S. inflation rate was 1.5% through the 12 months ended September 2016, as published by the US government on October 18, 2016. With the current rate of most of these cash-equivalents investments, you wouldn’t have been able to even cover inflation for that period and for comparable future periods!

Déjà vu: What happened with Brexit?

It would be foolish to discuss the financial effects of this U.S. presidential election without considering something very relevant and recent: the U.K.’s European Union (E.U.) referendum (better known as the “Brexit”) in June 2016.

We’re a few months out from that historical referendum and the facts show that the key benchmarks of the U.K. stock market are up from June 23, 2016.

Here’s a sample of benchmarks from the London Stock Exchange:

FTSE 100FTSE 250FTSE 350FTSE Small CapFTSE Techmark All Share
June 23, 20166,338.1017,333.513,535.164,590.453,096.63
November 9, 20166,911.8417,590.993,808.104,864.293,371.79

If you had decided to cash out your holdings on any index funds tracking these benchmarks after the Brexit referendum results were announced, you would have missed out on these returns. It’s interesting to note that the IMF and other think tanks expect the U.K. economic growth to slow down in 2017, but the performance of the U.K. stock market in 2016 for the last five months has shown that holding on to your investments in a post-Brexit world would have been a savvy decision.

For a full analysis of Brexit and a review of the concept of systematic risk, read Your 401(k) During Market Volatility: The Brexit Effect.

Here are your 401(k) action steps, or lack thereof

1. Remember that index funds are diversified investments that minimize risk

You have a smaller exposure to financial risk by investing in a basket of commodities than in a single stock. Here’s an example: the Vanguard 500 Index Fund Investor Shares (VFINX) and the Vanguard Small-Cap Index Fund Investor Shares (NAESX) currently hold a total of 505 and 1,437 stocks, respectively.

2. Trying to time the market has been proven to reduce your investment returns. So don’t do it.

In hindsight, you could have tried to sell your holdings on the FTSE 350 on Tuesday, October 4, 2016, when it peaked at 3,909.70. Hindsight is 20/20, right? Could you have guessed that before the fact back in October? In reality, numerous academic studies have shown that this type of attempt to guess market behavior can cost an investor between 1.5% and 4.3% per year because individuals are notoriously bad at predicting the market.

Even professional wealth managers have a hard time timing the market. Only 20% to 35% of actively managed funds beat the benchmark for their categories and these are the folks who this for a living!

3. Trading frequently can trigger fees on your 401(k).

Don’t believe the myth that a 401(k) plan has no fees. There are fees and administration costs to both the employer and employee for the 401(k). By trading often in response to short-term news, you may trigger hidden 401(k) fees. For example, a backend load (also known as a redemption fee) applies when you don’t hold a fund for the minimum holding period, which can range from 30 days to one year, depending on your plan’s rules.

Learn more about Hidden 401(k) Fees and What to Do About Them.

Note to Human Interest clients: We do not charge fees like this, but we would still recommend against fiddling around with your allocations in general — see the point below.

4. Avoid increasing or decreasing your exposure to a specific sector or industry (pharmaceuticals, technology, agriculture, etc.)

Throughout his campaign, Donald Trump has expressed his commitment to building more infrastructure to generate greater economic growth and more jobs. Therefore, you may be trying to place some bets on individual companies within the industrials and materials sectors and/or lowering your exposure to industries you think he’s not as committed to growing.

This is risky because you’re not a mind reader, and you actually may be ponying up more than you’re expecting. When you hold the Vanguard 500 Index Fund Investor Shares (VFINX), you’re already putting 12.60% of your investment in those sectors (9.70% in industrials and 2.90% in materials, as of September 30, 2016). By holding a well-diversified index fund, you’re already exposed to most sectors through one or several companies.

Attempting to lessen the diversity of your funds because you’re absolutely sure that Obamacare will be repealed (or something similar) will significantly increase your risk exposure.

5. Invest in international markets through highly liquid funds

If you want to diversify your investments to international markets, do so with an index fund. The smart way to hold stocks in international markets is through international low-cost index funds. For example, there’s the Vanguard Total International Stock Index Fund Investor Shares (VGTSX), the Vanguard Developed Markets Index Fund Admiral Shares (VTMGX), and the Vanguard Emerging Markets Stock Index Fund Investor Shares (VEIEX).

Through international index funds, you avoid any potential liquidity issues in case you need to close your position and you benefit from low annual expense ratios, such as 0.19% and 0.09% for the mentioned Vanguard international stock and developed markets index funds, respectively.

For more index fund options, take a look at Beyond Equity Index Funds: Bonds, International Stocks, and Real Estate.

The bottom line: Hold on to your funds

Your plan, for now, should be to stay the course: Human Interest was founded to help all investors stay the course by removing emotion from the balancing and selection of their funds. Technology is quite good at remaining objective and sticking to long-term goals, and humans much less so.

If the market moves again in the next few weeks or in 3 months, when Donald Trump officially takes the reins as President, remember how recent history played out with Brexit and the history of annual returns from U.S. equities and bonds. You’re in this for the long run, so focus on keeping your investment fees low and maintaining your target risk exposure.

Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.

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