As we are fast approaching the Presidential election, the popular question being asked is “what financial changes should I make with the upcoming election?” In the next several weeks you are going to hear a lot about elephants and donkeys – the symbol for the Republican and Democratic parties respectively – but as we are bombarded with political ads, I want us to keep in mind an elephant of another sort.
In the book Switch: How to Change Things When Change is Hard, Chip Heath and Dan Heath outline a framework for change that involves a Rider, an Elephant, and a Path. In short, riders are great at analyzing information–think of them as the rational side of our mind–but often that is where change gets stuck…over-analysis. The elephant is the emotional side and pleasure-seeking side of your brain which is easily distracted by what is in front of itself and loses sight of the long-term goal. Finally, the Path is what the Rider and Elephant travel together to get to their destination or goal. When the rider and elephant fight one another, it is easy to get off the path and change becomes difficult, but when they work together, the path leads to their goal.
The Rider, Elephant, and Path Framework and Financial Planning
By now, you are probably asking yourself: What does any of this have to do with the election and my financial future? By using the rider, elephant, and path framework, we can cut out all the noise from the upcoming election and focus on what is important to you and the future you paint for yourself.
As I said above, the rider likes analysis, so the rational side of our brain wants data…lots of data. So, in a time of uncertainty, like an election, our natural reaction is to reach for various investment theories. One popular theory is that the stock market does better under one political party. Another popular theory is that the stock market does well in election years. It is easy for the rider to get overwhelmed with all the charts and information and get stuck in “analysis paralysis” and not sure what it all means for their situation.
So now we have a confused rider, what about the elephant?
Caught up in our 24/7 news media, it is easy for the elephant to become overwhelmed, especially when the “noise” becomes loud around the election time. Each party is running ads spelling out the “doom” if the other party gets elected. Add in the on-going COVID-19 pandemic, and our emotions can be hard to keep in check.
Now we have the perfect storm–a confused rider and an emotionally spent elephant. Good luck finding any path! However, if we keep a few things in mind, both the rider and the elephant can find the right path and work together to move forward.
1. Show the rider data that illustrates a long-term investment strategy should not be solely based on a political party.
According to a chart from Schwab, a $10,000 investment in the Ibbotson U.S. Large Stock Index started on January 1, 1961, and invested only under a Republican White House would have grown to $86,397 by the end of 2019. If that money would have been invested only under a Democratic White House it would have grown to $376,010. However, if the Rider stayed invested, regardless of the political party of the White House, that same $10,000 investment would have grown to $3,248,612 by the end of 2019. Rather than basing your portfolio philosophy on what political party controls the white house, staying invested still makes the most sense.
Next, let us focus on the idea of investment rate of returns in election years. Data compiled by Schwab shows that the nonelection year average return for stocks was 8.21%, while election year rate of returns was 6.67%. Not a huge difference between the two scenarios and certainly not one that I would feel comfortable using as a guiding investment philosophy. The risk of being wrong is much greater than the gain of being right.
2. Remind the elephant of the long-term plan.
Have you ever stopped to realize that the most important part of any puzzle is…the picture on the box? Good luck putting the puzzle together without that picture, it is probably doable, but not with my level of patience! Reminding the elephant, by showing him a vision of the future he and the rider are working towards, will go a long way to staying on the right path. If your goal is saving for retirement, find a picture that reminds you of what you want your retirement to look like and put it on the fridge or carry it in your wallet. It sounds silly or simple, but the elephant needs an emotional attachment to keep on the right path and not be distracted by the shiny investment object of a get rich quick stock tip.
While we need to remind the elephant of the vision, it is just as important to motivate the elephant on a regular basis. As mentioned above, the elephant can get sidetracked with all the distractions of the election…distractions that are out of its control. In our case, we can motivate the elephant by reminding it of the things within its control and the progress that has already been made towards the destination or goal. Last month I wrote an article outlining some financial cairns that we can use to show the elephant progress and keep it motivated. The advantage of using these financial cairns is that they are within the riders’ control.
3. The path’s destination should not change just because of an election outcome.
There are lots of reasons you may want to change your path’s destination. As we age, priorities and values change, so what you thought would be an ideal future 10 years ago may no longer be the case and that is fine. However, we cannot let the elephant change the destination just because of a particular election outcome. Your path, or financial plan in our case, was created for you based on the future you envisioned and shared with us.
However, times of political change do not mean we close our eyes on the path and risk stumbling on a rock or log. We may need different tools or strategies to complete the path, depending on the outcome of the election. Our experience shows it can be helpful to have a guide for when the inevitable detours arise, but a good guide reminds the rider and the elephant where the path leads in times of change.
At Stewardship Advisors, we are not here to be the rider or the elephant, but the guide who walks with both down the path towards their ideal future.