I have a retirement plan that auto adjusts based on how close it is to my retirement date and a robo advisor set up for establishing a future business.
I am concerned November elections will cause a retreat in the stock market. Would it be wise to temporarily increase the fraction of bonds in the portfolio? What are pros & cons of such a strategy?
Deciding when to buy and sell based on market conditions is called "Timing the market". It's a 4-letter word in the broker business. We'll come back to that.
The President, via the Fed, absolutely is capable of pumping up the economy and creating a stock market "bubble". One incentive for a president to do this is an an approaching election, since the economy (pro or con) can be a major selling point for a candidate.
The problem is, as I alluded, No broker on earth is going to advise you to "time the market". Think about it. If timing the market is a responsible thing to do, then a broker's job would include telling you to when to step in and out of the market, and the broker could be held financially responsible for bad advice.
How would this even work? Brokers aren't in the business of providing performance insurance to small time investors, so they don't want to be in the position of being held responsible for market ups and downs. Even if they got it right, it would incite panic, as no broker wants to be the one who didn't tell their clients to get out when all the other brokers are saying that. So "Timing the Market" is something brokers simply cannot abide. They can't do it. They can't tell you to time the market.
Brokers want you to view the market as a savings account, and put money in when you have it, and take money out when you need it.
The problem is, when you do time the market, that is not guaranteed. There is an element of risk. The market could continue going up after you sell out, in which case that's gains you didn't make. Or it could go down somewhat before you sell, costing you gains.
Or presumably, your goal is to step back into the market when it's at the bottom, i.e. Wall Street is having a 50% off sale. But again, how do you know when the bottom bottom is? You could get on too soon and watch it drop more. You could get on too late and have lost some gains.
I think AAPL peaked at $27 and I got out at $25 (8% loss). And it bottomed out at $11.80, and I got back in at $12.86, so 9% missed opportunity right there. So that's 17% I "ate" on both sides of the equation. But I nearly doubled my holding.
Of course I could've just stayed in, taken the beating, and my stock value would've recovered in a little over a year.
The upshot is, that timing the market is dangerous.
Is it unpredictable? Not so much. After all, go back to what stocks are and the basic principles of evaluating a company's worth. You see a lot of outliers - look at Tesla, it's worth more than GM. Are GM's fundamentals worth more than Tesla, who owns one assembly plant? Oh, you betcha. It is possible and commonplace for stock prices to deviate significantly from the business fundamentals supporting that price. So it's up to you to look at the fundamentals of stocks, versus their trade value, and evaluate whether the trade value justifies the fundamentals, and whether the stocks are overpriced or under-priced.
When timing the market, your goal is to do that for the whole market.
In 2008, much like AAPL, the market recovered all of its lost value in a couple of years.
But what unfortunately happens with novice investors is, they see all the terrible news reports, and they go "The sky is falling! The market has forsaken us! Preserve what little value you have left! SELL SELL SELL!"
So, when a novice investor does that, here's the important thing. That is timing the market. Get it?
And it fails for these novices because they are violated the rules: "Buy low, sell high".
The correct thing to do, when stock brokers are jumping out of windows on Wall Street is, buy. Wall Street is having a half-off sale.
I believe you may have an invalid premise that the election of 2008 caused the down-turn in the economy. The timeline is as follows: the fall started in Oct 2007, had the record setting day "crash" on Sep 29, 2008, then Obama was elected in Nov 2008 and took office in Jan 2009, and the markets continued to fall until Mar 2009 when they began their ascent again. It's been overall pretty good news since then. The markets continued to rise through Obama's reelection in 2012 and Trump's win in Nov 2016. Note that on the night Trump won, which was largely a surprise, there was a sudden drop in the markets but they had fully recovered by morning, and they have generally continued to rise since. In other words, it's unlikely that this presidential election will affect the markets in either direction for more than a short time, regardless of the outcome.
That being said, if you are concerned about short term market fluctuations (for any reason), then you can simply re-balance some of your portfolio into a more conservative layout. Bonds may be part of that answer. Putting some of your portfolio into an earlier target-date fund may also achieve a similar goal.
The risk with reallocating into bonds include:
With regard to the latter, there can be any number of reasons the market could move in favorable direction and you will be chasing the market. Rare is the asset (stocks, bonds, gold, etc.) that is immune to war, politics, etc.
As to whether a decision is "wise", conventional thought would have you mitigate short term risk by diversification to ride-out the bumps. I do think it wise that Decisions should not take into account comments from strangers behind computers.
The pro of reducing market exposure is that if you are correct, you'll save yourself some money.
The cons of reducing market exposure and increasing bond exposure are: - transaction fees if you still pay commissions - B/A slippage - taxes on non sheltered gains - opportunity loss if the market continues up without you after you re-allocate
The typical answer against doing this is that you are trying to "Time the Market" and that timing does not work. While that conclusion is correct, it presents it as a binary black and white decision. Either you
(a) Guess where the top is (luck) (b) Do nothing and incur all of the pain if the market drops (see down 50% in 2000 and 2008)
There is a third choice, well choices. And there are many of them. Here are my thoughts on how to Protect Your Portfolio
Risk and reward go hand in hand. If you want less risk, accept less reward. Play in the middle and leave the tails to others. It all depends on your market experience and personal risk/reward tolerance.
