Despite investor concern over how the election outcome will affect their portfolios and what action they should take to prepare, U.S. politics do not play a significant role when it comes to the underlying valuation of assets in portfolio design and allocation over a long period of time, Mehalko said.
“People tend to think that a Presidential election or other political events will impact their portfolios over a long period of time, but they typically don’t,” Mehalko said.
History has shown that neither the election nor the term of an elected official play a significant role in the long-term performance of the market according to Mehalko.
To illustrate his point, Mehalko debunked three common misperceptions among investors.
Myth # 1 – Tax rates drive revenues.
There are many factors that drive revenue growth and history shows that the tax rate is not the most import one, according to Mehalko. For example, even though marginal tax rates ranged from a high of 91% in 1960 to a low of 28% in 1987 personal income tax revenue rates remained in the typical range of 7-9% of GDP, he said.
Additionally, the historical average of total tax revenue over 65 years stays around 18% of GDP even with varying tax schemes in place, according to Mehalko.
Myth # 2 – A Republican administration is better for financial markets than Democratic administrations.
Actually, looking only at what party holds the executive branch, the equity markets do better under a Democratic president, according to Mehalko. But in fact, the best scenario is split control with one party controlling the executive branch and one controlling Congress.
Myth # 3 – Elections will impact the financial markets.
Though the markets may react initially to the “shock” of a new administration, it’s unlikely that elected officials would enact harsh policies that would hinder “prosperity” in the short-term, according to Mehalko.
Ultimately, Mehalko said, investors shouldn’t worry about who wins the election when it comes to the impact on their portfolio over the long-term.
“Focus on valuation and managing emotions. Try to buy at the right time, be patient and don’t fall prey to the fear and greed behavioral issues we all have,” said Mehalko.