In November this year, the US will be holding its presidential elections to usher in a new president to the White House. Never mind that the elections are only for the US citizens to choose their leader, but the mere fact that the US president is the defacto world leader makes the elections a big deal across the world. Everyone talks about them and follows the election process keenly since the outcome has direct or indirect impact on how global geopolitics plays out in the following four years.
Financial markets are not spared either, and they are known to be very volatile in the months before the US presidential elections and immediately thereafter. Normalcy returns after the new president has been sworn in and his policy direction been clearly determined. Before then, investors are always uncertain about the future and their wait-and-see sentiments are reflected in the volatility in the markets.
For a retiree who fully depends on your pension and passive income from your investments, you do not want to be caught up in the random financial markets movements during the elections period and immediately after the swearing in of the new president. The volatility can be very random with huge margins on either the positive or the negative side of the chart. In the event your investment is affected adversely, it will be very hard to recover and it might take a long time to regain the value of your wealth to the level where it was before the drop in market prices.
To be prepared for the volatility in the markets before elections, one might have a clear portfolio realignment so as to reduce risk exposure. An investment allocation to different investment vehicles might have to be altered from the high risk investments to the low risk investments in order to maintain the value of your wealth throughout the high tides of the elections period.
Stock markets tend to be affected more as investors tend to adopt a wait-and-see stance during the elections period. Each president has their own leadership priorities and different perspectives on the policies that affect various sectors of the economy such as healthcare, education, energy among others. Investments in these different sectors therefore tends to take a dive as investors press the pause button; and wait for the time when they are very sure about the new policies that might be implemented by the new president in office. This reduced allocation of investment funds to different sectors affects the listed companies operating within those sectors and as a result this pulls down the overall market performance.
You definitely do not want your cash to be trapped in such kind of a downward market movement, without a clear plan on when exactly they will rebound. To protect the value in your wealth, you might need to look for alternative investment vehicles with a lower risk exposure event during the elections period.
Among the alternatives available is investing in government treasury bills. Lending to the government is considered to be a risk free investment since your repayment is guaranteed by the tax levied on the citizens by the government. By investing in the treasury bills therefore, you are normally assured that your wealth will be protected over the elections period. Your return on investment will however be very low.
You can also opt to trade gold as a way of preserving the value of your wealth during the uncertain elections period. Gold and other commodities like diamond are considered to be safe havens and investors tend to acquire more of those during times of economic uncertainty. As the demand the commodities increase relative to their supply their prices also usually go up and therefore as an investor you end up getting higher returns from the capital gains. However, when acquiring gold or any other commodity during times of economic uncertainty, the goal is often wealth preservation rather than capital gains. This is due to the fact that the US currency tends to weaken when markets are being driven down by negative economic forces and hence need to preserve wealth in commodities.
Another option to choose from is to put your money in a fixed deposit account. In this option like in investing in treasury bills, you shall be assured of a fixed rate of return in the end of the deposit period. However, if inflation goes up causing the depreciation of the US dollar, then your wealth might actually end up reducing in value if the inflation and depreciation rates of the dollar are high than the interest rates you earn on your fixed deposit account.
Each individual will definitely have a different preference in terms of how to preserve their wealth during times of economic uncertainty. However, one thing is common among all investors; they will always look for an option that reduces their risk exposure and preferably even grows their wealth during that uncertain period.
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Posted by Yanira Farray on 2:07 pm, With 0 Reads, Filed under Economy. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.