5 Common Mistakes Investors Make Prior to an Election

History shows that investors are most active during election years. Yes, you want to make adjustments based on the current political environment, of course, but within reason. There’s no evidence suggesting dramatic changes in your portfolio prior to an election will guarantee a favorable outcome.

Here are 5 common mistakes that you should avoid during an election year:

1. Going to all cash

Taking your money out of the market is never a good idea and will likely result in unfavorable tax consequences. If you’re set on moving your portfolio to a more conservative allocation, remember there are plenty of alternatives to cash that pay a small yield.

2. Selling out of an entire sector

After Bill Clinton’s 1992 election, many people were concerned with the fallout of healthcare. A lot of people abandoned pharmaceutical stocks because of the perceived political risk. Unfortunately, they missed out on one of the great long-side trades of the decade.

3. Over-allocating to one sector

If an investor trades out of their diversified positions and concentrates their assets in one sector—say for example defense stocks—they’ve already lost. This is a risky strategy that could have an irreparable outcome.

4. Comparing performance

It’s human nature to compare one thing to another, however it’s not always in our best interest to do so. Near an election, the media will often report on stocks that have performed exceptionally well, thanks to one candidate or the other. Some investors can’t help but act on their fear of missing out, which will manifest in hasty investment decisions.

5. Suspending contributions to a portfolio

Investors may conclude that by skipping the next few contributions to their accounts they are avoiding volatility. The reality is events like these will occur dozens of times throughout their lives. Neglecting their investments during these periods will likely reduce their ultimate portfolio balance.