How Politics and Markets Impact Your Long-Term Investment Strategy

Following the recent election, financial markets have quickly shifted focus to what comes next. While stocks and cryptocurrencies have jumped higher, it’s important to look beyond short-term market moves and maintain a balanced, long-term approach to investing.

Current market prices are higher than usual compared to company earnings

The economy is currently doing well, with inflation cooling down from recent highs and the Federal Reserve (the nation’s central bank) starting to lower interest rates. However, the strong market rally since late 2022 means that many investments are now more expensive than their historical averages.

Markets often swing between extremes as investors get too excited or too worried. This happened after the 2016 election too – stocks went up a lot in 2017 but then fell in 2018. This shows that even when things look very positive, markets rarely go up in a straight line.

When investments are expensive, future returns tend to be lower

The current market enthusiasm relates to expected policies from the next administration, similar to what happened in 2016. But as famous investor Benjamin Graham said, “in the short run, the market is a voting machine but in the long run, it is a weighing machine.” This means that while prices can temporarily disconnect from reality, they eventually reflect the true value of investments.

As shown in the chart, when investments become expensive, they often deliver lower returns in the following years. This doesn’t mean we should avoid investing, but it suggests being careful about how much risk we take.

Different types of investments can help spread out risk

While U.S. stocks have done well, other investments like international stocks and bonds can help protect your portfolio. International stocks are currently less expensive than U.S. stocks, and bonds provide steady income and stability when markets get rough.

The good news is that company profits are growing and the economy remains strong. The Federal Reserve is also helping by lowering interest rates, while keeping an eye on both inflation and jobs.

The bottom line? Long-term investment success comes from focusing on broader economic trends rather than short-term market moves. A well-balanced portfolio can help you benefit from good times while protecting you during uncertainty.