Your Portfolio Doesn’t Care That It’s An Election Year – Episode #565

Investors often wonder how presidential political outcomes will affect their portfolios.  On this episode of the Dentist Money Show, Matt and Rabih dive into the common myths surrounding investing during an election year. They break down three widely believed misconceptions, explain the unpredictable nature of market reactions, and explore why political changes don’t dictate long-term investment success. Whether you’re feeling anxious or excited about the election, Matt and Rabih will guide you through strategies to keep your investments steady and focused on your long-term financial goals.

Related Readings

Election and Investing: Debunking Common Myths

How Many Stocks Succeed?

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Podcast Transcript

Intro: Hey everybody. Welcome back to another episode of the dentist money show brought to you by dentist advisors. We have a great show for you today. Rabih and I talk elections and investing. I know we did a TLDR on this episode a few weeks ago, but we are doing an expanded show on the article we released in September and Rabih and I just giving really our thoughts. Rabih bringing a ton of data, a ton of insight and value from his perspective and data around the intersection of elections and investing as always. We hope you get something out of this, something of value. We hope you enjoyed the show.

Matt Mulcock: Welcome everybody.

Matt Mulcock:  Okay, Rabih, we have something big coming up in November. not

Rabih Dimachki: is it?

Matt Mulcock: Something, something big that a lot of people are talking about. It is a new season of dancing with the stars. And I’m just kidding. I have no idea. okay. We thought it would be helpful.

Matt Mulcock: We probably should have done this earlier in the year as we, as I thought about it, but, can’t go back now. We thought. It would be appropriate to talk about this massive election coming up in November, not from a political standpoint. We do not do that here.

Matt Mulcock: We don’t get political here.

Matt Mulcock: We want to avoid that at all costs, but we do think it’s appropriate to talk about this from an investment standpoint, investing standpoint. And I actually wrote a piece about this for our September newsletter. If you have not seen that, you should definitely check it out. not my article specifically our newsletter that sounded like a very shameless plug for myself but we do a newsletter every month and part of it is we want to write something that we think is is valuable And, top of mind for people are just something that can add value in some way.

Matt Mulcock: And so our September one, we thought let’s write about the election. And then again, you and I were like, let’s, let’s take this a little bit deeper. So as we jump into this, anything you want to start with any thoughts initially about investing in election years, or just the intersection of investing in elections at all, any thoughts that come to mind?

Rabih Dimachki: uncertainty. usually we only worry about uncertainty in financial markets, but election years are interesting because you’ve got uncertainty in your portfolio and in your day to day life. So, we understand why people might be as anxious and worried and hopefully, we’ll just chat about it today to make people feel at ease.

Matt Mulcock: Uncertainty is I think the number one thing humans fear more than anything, especially when it comes to investing, but probably life in general. but definitely with investing uncertainty is the worst possible thing that the markets like, that’s what creates the most volatility.

Matt Mulcock: The most fear is that uncertainty. And I’m glad you brought that up because that’s a theme in the, in this article and what we’re going to talk a lot about today. So, I guess to kind of use this as a framework, I’ll just kind of lay this out, what I wrote about. And again, we’re going to use this as kind of our outline.

Matt Mulcock: And then as in true Rabih and Matt fashion, I’m sure we’ll go on some tangents, but the article was, or is titled elections and investing debunking, common myths. So as it says in the title, I thought, let’s talk about some myths that people, I think some misconceptions people have around investing in election years, I would dare say, Rabih, tell me if you disagree, but I would dare say most people, when they think of investing in election year, they have negative feelings.

Matt Mulcock: They’re like, Oh, it’s gotta be crazy. Was that, is that kind of your first instinct of what people would say as well?

Rabih Dimachki: Yeah, when were elections a positive thing, right? Every elections people are, have a generally bad sentiment. it would be very funny if one day it’s like, Oh, this is an election year. I can’t wait to vote again for the same people.

Matt Mulcock: Well, and it feels like that more than ever before. You’re totally right. We, we actually, in our meeting earlier today, this is probably the only political statement I will make for the rest of the time. And I think it’s still pretty, we’ll see, but it’s pretty neutral. But one thing I did know, I will say.

Matt Mulcock: That, no matter what, what I’ve learned, what I’ve learned, that no matter what, when November 5th or 6th or whatever day it is, when that day comes and goes, the world’s over, I’ve learned that no matter who wins, the world is over, apparently. That’s what the other side is saying. The world is over. So, that’s what I have, that’s what we have to look forward to, everyone.

Matt Mulcock: We are, the world is over. okay, so, let’s connect again, use this as a framework. We have three myths that we’ll kind of use as our, as our kind of headline that we’ll then talk about. So these are, and to back up really quick, Rabih, you said something else. That’s really interesting that I really like you said that we understand, right?

Matt Mulcock: We have empathy for people when they’re thinking about being afraid of what’s happening in markets and feeling uncertainty. I think more than most years, as bad as it is, but election years, the media is going wild with stuff. Like, I make this joke about, no matter what, the world’s over. That’s literally what it feels like.

Matt Mulcock: Depending on what side of the aisle you’re on, like, if that person wins, the world’s over. If that person wins, the world’s over. Here’s, I guess, maybe a bonus myth we’ll start with. Everyone, the world is not over. Whoever wins the world, we’ll move on. We will be okay. Maybe that’s myth. Number one, we need a bust, or bonus myth.

Matt Mulcock: So let’s actually get to myth. Number one. The myth statement is that your portfolio cares who wins the election. what are your initial thoughts, Rabih?

Rabih Dimachki: The portfolio doesn’t care. The economy cares. And like, that’s where I would draw a distinction. when a certain political political party is being voted into office, they come with twin quotations promises on an economic policy or economic reform on how they would want to move the country forward, usually, whether it’s, you know, it gets implemented or not as a different story, but, if it gets implemented and it.

Rabih Dimachki: adds a certain, value to the economy, you might see changes whether, you know, in whatever direction the political party is taking the economy. How will the stock market react to that? And in a sense, your investments is still A big question mark, and not because the economy and the stock markets are dissociated from themselves, but due to the nature of the stock market itself.

Rabih Dimachki: If you throw elections aside, if you throw economics aside, the fact that you have an information does not mean that the market is going to react the way you expect it to react. there’s a layer in between, that actually. it creates that degree of separation where it creates, you know, the uncertainty of how the markets react.

Rabih Dimachki: The simplest example would be if I’m going to tell you tomorrow, we’re going to have a pandemic that’s going to change our lives forever. And we’re going to talk about it for centuries. you would expect the market to go down because the pandemic is a bad thing. Yet in 2020, the reaction from the stock market after, you know, monetary intervention and information we were collected about that virus, actually. Put us in a 15 percent gain after all the volatility for that year on the S& P 500. So the fact that there’s a layer of separation. Intrinsic to the characteristic of how market works just makes it immune to whether it was elections or whether it’s positive news or bad news. The market has a brain of its own.

Matt Mulcock: Yeah, that’s a good point, Rabih. And the other part of this too, I think is that we assume, I think it’s very simplistic, but it’s all, it’s very, understandable why we do this, but I think as a collective, we assume, okay, that this person enters office and they’re going to like flip a switch on all of these things and it takes immediate impact on who wins the election.

Matt Mulcock: X, Y, or Z thing, as opposed to the truth, which is we live in a very complex society. We live on this massive ship that’s hard to turn. And so in a lot of ways, even if the economy does care, and I like the distinction you’re making of the economy and the markets, let’s, I agree, the economy cares way more than markets care.

Matt Mulcock: And we’ll hit some numbers here in a second. But even though the economy cares, it’s not as if person X gets an office in November versus person Y. And there’s going to be immediate changes by December. Like, no, that doesn’t, it doesn’t happen like that. So the other thing that we need to remember is.

Matt Mulcock: We’re still dealing with policies that put in place and changes made from like two presidents ago. Like we’re in, we’re still filling those things. It’s just not an immediate, like the time it takes to actually implement. But if we’re just isolating the market specifically and your portfolio, as I wrote, like your portfolio specifically, it doesn’t care.

Matt Mulcock: So we have a chart here and just to give you some data, an actual data point that I wrote about a thousand dollars invested in the S and P 500. When FDR took office. would be 22 million today. Since then there have been eight Democrats and seven Republican presidents. The market just doesn’t care. It just keeps moving.

Matt Mulcock: And because there’s so many other variables outside of who the president is. There’s so many variables that impact markets and investments and how you should be approaching your investments. So Rabih, what other thoughts do you have on this?

Rabih Dimachki: I love that you hinted about how complex it is and the reason the market doesn’t care because you have to go through so many channels and through so many doors to the end result of whether the price is going to go up or down the price. Like if we have to the terrain that we’re playing on, like just having a president doesn’t have an, elected a certain president doesn’t have an, relation to the stock price, but there is a very narrow, thin, connection that can be drawn.

Rabih Dimachki: And. Excuse me for going on like a tangent for a few seconds, but the idea

Matt Mulcock: Tangent, baby. Go to the tangent

Rabih Dimachki: But like, if we really understand how is that connected to this one, because we kind of reduce it in our brains. Like, Oh, a president is going to do that. He’s going to sign an executive order and boom, the stock market will go down or up like we, we narrow the connection.

Rabih Dimachki: So closely, but if I want to start from the stock price and go all the way towards who is the president that gets elected, let me just walk you through how many challenges we have to go through, First of all, the price of a stock is going to be reactive to two things. Growth and risks growth is whether the industry they’re in is growing or not, whether their cash flows are going to be growing at a certain period or maintained.

Rabih Dimachki: And the risk is going to come from like the macroeconomic cycle that every economy goes through. And you know, whether we have inflation, whether we have unemployment, whether we are open to international trade. So those two together, along with whether the company is creating value by new goods and services are what are going to determine the stock price.

Rabih Dimachki: So. The cash flow depends on the industry, but the risks depend on the economy. So now we jump from the stock price to the economy and the economy is going to depend on, you know, the interaction of all the different agents in the economy, like the dance between consumers and the government and businesses and the rest of the world.

Rabih Dimachki: And that dance itself is going to have an impact. On these risks that affect the stock price, but in each of these categories, the consumers, the government, the businesses and exports and imports, they have their own self sustaining mechanism. Consumers due to the life cycle and how many people are being brought into this world and how much they want to consume and what are their needs and desires.

Rabih Dimachki: And what’s the new fashionable thing to buy businesses like, what are the new opportunities to create money, whether it’s from new technologies, Right. And, or just consolidating markets and government is, by how I can say they’re collecting their revenue and they are, you know, imposing a policy that creates equity and fairness for all the citizens and imports and exports.

Rabih Dimachki: It’s like thinking about the whole planet as a whole. So these are like four different subcategories, subcategories in the economy that affect the risks that affect the stock price, and that’s And we’re still haven’t reached the president. So we have to go back a layer beyond that. So what are the laws and regulations that affect the consumer, the investments, you know, the government and imports and exports.

Rabih Dimachki: And you get to a point where, Oh, these regulations are going to depend on a governing body through a certain democratic constitutional, methodology to, move from, An idea of a law to a law that’s applicable the end is governing those four elements of the economy. And once you get there, you understand that our political system requires, you know, a president to do so.

Rabih Dimachki: But to a certain extent, the president’s, authority is limited by how much support he’s got, or she’s got in Congress. Right. And whether a law requires a simple majority you get to a point where, You have to go through so many different channels, so many challenge that might delay an action plan from happening or actually, or sometimes make it happen faster than you anticipate until you get to a change in the stock price and on each of these channels, whether you require a majority in Congress to help you pass a law or whether you your policy actually had an impact on the economy and whether the economy itself had an impact on the risks that govern the financial markets is a very hard way.

Rabih Dimachki: You’re going from point A to point Z, but every single letter in the alphabet can change your direction. So to draw a straight line is simply. A reductionist way to make conclusions that makes you fall into a lot of logical traps. That was my tangent. Sorry.

Matt Mulcock: I love that. No, I love that, Rob, because you highlight again, the complexity of the system and the thing that I was thinking. Like the solution here is something that’s so simple. Something we’ve talked about so often is diversification, right? Because the president, whoever the president is one variable in a very, very complex, let’s be real, a global system, even though we’re talking about the president of the U S the impact that the president has over the global economy and interactions between countries.

Matt Mulcock: There’s a ripple effect there for sure. And, but you’re highlighting. I love that you said you went through all of that and you said all of that before we even get to who the president is again, highlighting this, this complexity. And again, while we reiterate this point so much that if you have a properly globally diversified portfolio, and you have a timeline that most people listening are going to have a multi decade timeline, who wins the 2024 election this year?

Matt Mulcock: Literally will not matter to your portfolio in the end, like at all. Now, are there going to be certain sectors, certain areas of the economy, depending on if it’s a Democrat, if it’s a Republican, like, for example, what I’m, one of the things I’m thinking of right now is like, if Kamala won, could that impact the energy sector differently than if Trump won because of her stance on fracking like, yes, of course, there’s going to be areas and industries that are going to be impacted depending on who wins in the short term.

Matt Mulcock: And if you’re a trader, let’s say you’re a commodities trader, you would be very interested in what’s happening. Based on just that one example I gave of like, if Kamala one versus versus Trump. But if you are a long term investor, it doesn’t matter. Your portfolio is sitting there being like, whoever bring it on. Who cares?

Rabih Dimachki: I love that you brought that up. I love that you brought that up because every day on the, you know, Financial News Dashboard, I see, oh, here’s the Trump trade. Here’s the Harris trade. And the Harris trade is to go long, probably, uh, clean energy companies. Right. And, the Trump trade is to go long on crypto and to go long on traditional energy sources. And, here’s the idea, whether Trump wins or, Harris wins, you’re not going to be adding like the fact that they want is not growing the industry per se, it’s transferring wealth from one industry to another. So when they say, Oh, the trade is that if Trump wins. Traditional energy versus renewable energy will be, we’ll have, you know, a longer time to run. It doesn’t mean that one is shrinking and the other is growing. It’s just money allocated to one is shifted than the other. So if you’re looking at the pot or the pizza as a whole, the pizza isn’t shrinking or growing. It’s just one slice is getting bigger on the, at the expense of the other slice. So if you are globally diversified, This is all insignificant to

Matt Mulcock: It’s neutral.

Rabih Dimachki: Completely neutral. And the other thing which you mentioned, which is a great is your time horizon. you might think that Trump or Harris’s decisions right now are going to influence your portfolio 40 years from now, but go ask the elderlies and tell them, Hey, what did JFK do on that specific day?

Rabih Dimachki: That impacts your portfolio right now.

Matt Mulcock: It’s such a good point. It’s yeah, I love that. Yeah. Looking back, it always looks like an opportunity, you know, even think of like Obama inheriting what he inherited and the mess, right. And people saying whatever they were saying at the time, and I’m sure all the news sources, whatever, when no way to nine hit, but looking back now, it’s just like, Ask anyone who now can look back and say, Oh, what an opportunity.

Matt Mulcock: Cause look what the market has done. It’s just, I love that you use that example. So, okay. So myth number one, your portfolio cares who wins the election. That is a myth. Your portfolio does not care for all the reasons we just highlighted. there’s a lot of reasons to care, but not from an investment standpoint or not from a portfolio standpoint, myth number two, Rabih stocks don’t do well during election years.

Rabih Dimachki: Got some data for you.

Matt Mulcock: Yeah, you do. I knew you would.

Rabih Dimachki: Okay. So I got, from, Yardini. Ed Yardini is a big economic researcher. One of the many researchers, economists, who, as you say, they, very good data, incredibly great source, but they fall to the fault of economists. They. tell you what, how something happened after the fact, right?

Rabih Dimachki: This is what you always say about economists. But, on his website, they’ve, compiled the performance of the S& P 500 in terms of, the presidential years. So what’s the average return for all the first year in the terms of the president? What’s the average return for the second year? Across all different presidents.

Rabih Dimachki: And here are the numbers, S& P 500 index and the first year of presidential terms from 1929 till now, the average has been 6. 7%. So if you take the first year, every first year out there since 1927 till now, if you average them out, you get 6. 7 percent return For the second year, the return was 3. 3%.

Matt Mulcock: A little bit downturn.

Rabih Dimachki: Is a little bit lower. And the third year, it’s 14%, which is a really much higher year. And in the fourth year, that’s the presidential year. That’s the election year. That’s when everyone is worried. where do you think it ranks between the first year is 6%, second year is 3%, third year is 14%.

Rabih Dimachki: So that’s the range. Where do you think the fourth year

Matt Mulcock: I’m going to say on the higher end of that range, but in between.

Rabih Dimachki: Because like presidents want to make sure that the market is doing well before they leave office or something. That’s a good argument. Actually, the average for the fourth year across all presidential terms is 6. 2%.

Matt Mulcock: Okay.

Rabih Dimachki: So it’s in line with their first year.

Rabih Dimachki: So if you think about it, their first year and their last year in office, assuming they’re only doing, it doesn’t matter the first year and last year of their terms, whoever the president is, are kind of the same on average and the second and third years. Are the ones that are on the extremes. The second year has been the lowest.

Rabih Dimachki: The third year has been the highest. what does this data tell us? Not much. I’m sorry.

Matt Mulcock: Yeah. I think what it tells us is the idea. I think most people, if you asked them, do stocks do well during an election year, they’re going to say, no, because of what you’re saying, there’s so much more, it feels like so much more uncertainty and we naturally attribute uncertainty to crazy down markets.

Matt Mulcock: But in reality, it’s Just kind of normal. some data that I’ve seen one thing that I referenced, this is from, I believe from DFA Rabih, was talking about how from 1928 to 2023, on average, if you just took just election years versus all other years, all other non election years, it actually outperforms by about, Almost one full percentage point. Almost exactly. It was like 0. 9 percent more on average. So I think again, the story that your data is saying, the data that I referenced in the article is just that it’s kind of normal, like most election years are just normal market years for the most

Rabih Dimachki: They’re normal and I will go to a little bit further with the argument just to add some math to it if on average the market is making seven percent The average volatility in a year, the standard deviation for the S& P 500, because we have that return, is 15%. So when you take into consideration that the swing to the upside or the downside 68 percent of the time is 15%, the fact that it did 6 percent 14 percent 3 percent or a full one full percentage point above non election years just tells you that this is still within the normal variation, which means we can’t extract any insights that yet.

Rabih Dimachki: Yes, this is different than that one. And like, this is how statistics is done. Like, even like, with medicine. they give a medicine to a group, and they don’t give a medicine to the group, and they look at the different, the means, right? And on average, those people recovered better than those people. But let’s look at the variation.

Rabih Dimachki: And if the variation is so high, you can’t determine whether the medicine is Effective or not effective the same thing with these stocks. Yes, it’s giving an average of 7 percent versus 14 percent or in election years. It’s 1 percent higher than in non elections here, but given the variation that the market sees, can we really distinguish these from zero or from having a difference?

Rabih Dimachki: We can’t really

Matt Mulcock: Yeah. There’s no significance there to say. Again, that’s why this is a myth. Stocks don’t do well in election year. It’s like, no, actually election years are pretty normal years from a market standpoint. And again, I think it, I think this one reinforces the first myth that we, we spent some time on to say, the system is so complex.

Matt Mulcock: I think we want to grasp it. One thing, because we want control so badly. And I understand we all do. We all want to tell ourselves a story that makes sense. And intuitively. It absolutely makes sense to say, take 2024 is probably more than any example of any history, every, any election ever. Like it is such an easy story to tell that the craziness that is only going to get worse Rabih over the next six weeks or so, two months, it is such an easy story to be like, the market’s going to go crazy.

Matt Mulcock: Like it’s going to be so volatile. Cause again, we want a story to be able to tell, and then we’re going to, and we’re going to get us to myth number three. Of what humans do about this, but I just think we find comfort in a story. We find comfort in control and control. We feel like we have control when we understand the story, when in reality, what you’re highlighting, when I love that you said, what does this data tell us?

Matt Mulcock: Not much. It does tell us that there is no control over this kind of stuff. We don’t know. And this one variable of a crazy election as crazy as 2024 is from an election standpoint and a media standpoint. Right. It’s just a normal market year. In fact, the market right now is doing fantastic in an election year. So Rabih, any other, you’ve got something where you’ve got your wheels are

Rabih Dimachki: Some that I don’t know if I want to go there, but the

Matt Mulcock: Go there.

Rabih Dimachki: We’re, we’re talking on like who the president is going to be and whether the president is going to change, you know, and have an impact on the market in one way or another. actually, I watched this every presidential cycle and in November.

Rabih Dimachki: There is a higher number of hedges like insurance products done on the market than in any other November when it’s not an election. So every election if it’s in November if you look at What is the insurance premium to hedge your stock portfolio, et cetera, and it’s usually more expensive there, aka there’s demand on hedging your portfolio and in 2020 Actually, we saw like at a drop of 7 percent in the S& P the week before elections, etc And then it’s recovered immediately after simply because of the amount of hedging that has been happening and it Kind of the conclusion from that is that it doesn’t matter who the president is You As long as there is a president, a. k. a. like the system is working because companies really care about the political stability that allows the capitalist economy to keep running like this is what they care about and the risk would be. Getting rid of this political stability, in a sense, a democratic process not happening, because once you go into more chaos politically, and there are no, you know, solutions on the horizon.

Rabih Dimachki: This will threaten the stability of the economy simply because the economy depends on In the u. s. At least on a fully functioning democratic system. So the market and the stock market do not care who gets elected as long as this you know, miracle of the 20, 19th century called democracy keeps on running.

Rabih Dimachki: So the market cares about more about the system, continuing doing what it does, which is create value and create this, the largest improvement in the standard of living in ever in the human history. Then the person getting elected. So I think that that’s the point that is worth making The system working is more important than who is running the system.

Matt Mulcock: Okay. Any other thoughts on myth number two, Rabih stocks don’t do well in election year to be sufficiently debunked that

Rabih Dimachki: Yeah, we’re the Mythbusters

Matt Mulcock: We are the myth busters. Okay. Except we actually like each other. You know, the whole thing is that those guys didn’t like each other. Have you heard this? Okay. Well, we’ll talk later. They don’t like each other, but they made a great show. okay. Myth number three, you can time the market based on the election.

Matt Mulcock: That’s a myth. So you can time. So again, these kind of build on each other. So kind of what I was saying earlier, kind of, so myth number two, we’re saying. The myth is stocks don’t do well. You were taught. I love that you were talking about like the Trump trade versus the Harris trade. the media is making you believe like you should act on this.

Matt Mulcock: And I, what I was saying earlier of like, we want to tell ourselves a story and then we want to be able to act on it. This is kind of that final myth of you think you know what’s happening. And even worse is you want to believe that you can actually time the thing and take action to like, take advantage of this.

Matt Mulcock: So what say ye Rabih? That myth number three, you can time the market based on the election.

Rabih Dimachki: Like we started the podcast saying like, even if you know the outcome for sure with 100 percent certainty on what’s going to happen, like the outcome of the election or the outcome of economic indicator, there’s still a risk that the market will move in a different direction.

Matt Mulcock: I love that you said that.

Rabih Dimachki: Right. And now we’re saying, even if you know what the outcome of the election is, or an economic indicator, not only the market is going to move in a different direction.

Rabih Dimachki: We will know when it’s going to move in a different

Matt Mulcock: Yeah.

Rabih Dimachki: Like it’s adding a second layer of risk. It’s like now two dimensional, not only the price level, but the time on when it happens. And it’s like, Oh, Really? We can do that. We’ll have the super power. Like it’s, it’s very hard, to time it.

Rabih Dimachki: And just like there were honestly, just like there were reasons for why a present doesn’t affect the stock price in a sense, just because there are so many different channels that we have to go through that the connection is as thin as a hair, when it comes to time and the, like the evidence based analysis of how we model stock prices.

Rabih Dimachki: Honestly, when they model how a stock price to do a Monte Carlo or to do whatever all they say Oh, we’re gonna bring something that’s completely random and unpredictable and we’re gonna model it based on its price randomness. So timing in the market has been debunked in academia for so long, just in predicting stock prices.

Rabih Dimachki: So now combining stock prices with politics and trying to model that as something that’s predictable, it’s a stretch.

Matt Mulcock: Yeah. I love that you just went through that. And I love that you highlighted again, this concept of. You could know exactly what’s going to happen and still get it wrong. Because the second part of that, as you highlighted is you have to know how people are going to react. And that is even harder than knowing what’s going to happen.

Matt Mulcock: So I love that you just highlighted that, but to this point, Rabih, we could just end this, I could cut this, this myth. I could cut a few words off this myth. So I said, you can time the market based on the election. The myth is. You can time the market just like that’s the myth based on election or whatever factor you want to factor, whatever variable you want to throw in there.

Matt Mulcock: If you’re out there thinking, Rabih, we joke sometimes as advisors where we get those calls or those emails and the first line of the email or the first words uttered by our client or someone we’re talking to says, I’m not trying to time the market, but, but hear me out. So the myth being, you can time the market.

Matt Mulcock: This just happens to be an election coming up. If you are out there thinking that you’re going to time it, or you’re going to get something right consistently or any level of precision. Just stop. I promise you this is going to hurt you more than ever help you and one of the probably the biggest risks to you behaviorally is by getting it right at some point getting lucky It’s like and thinking it’s skill, right?

Matt Mulcock: I think that is a that’s a scary proposition But one is one of the things I mentioned Rabih in this weird, Charlie quoting Charlie Munger or Warren Buffett, kind of like our godfathers. but what came to mind for me was just this quote. One of my favorites is the first rule of compounding is to never interrupted unnecessarily.

Matt Mulcock: And that’s the definition of timing. All you’re doing is interrupting the compounding that is required to actually build meaningful wealth. Any, any thoughts on that, Rabih? I’m going to give a quick stat here, but after you, any other thoughts you have.

Rabih Dimachki: Yeah, it’s just, my beef with linguistics, because when we’re saying about like how to invest properly, we’re talking about diversification, we’re going into this math, we’re going into the history and the science. And it’s a lot for people to handle and like absorb in one sitting. But when we’re talking about the way not to do it, we just tell people do not time the market.

Rabih Dimachki: And because it’s so short, it just sticks in their minds. It’s like, Oh, all I have to do is like time the market. And they think. They think that like timing the market is all it is, but let’s assume that I believe you, that timing the market is possible. It’s still as complex as proper portfolio management and diversification.

Rabih Dimachki: Okay. You say you can time the market. On which timeframe and to what magnitude and is it across all asset classes? And how do you know when that strategy will stop working and those correlations are going to break? Like it also goes If not more complex than, you know, the modern portfolio theory of how you diversify your portfolio.

Rabih Dimachki: So the fact that people hear the short sentence of, Oh, timing the market. And they think all I have to do is get lucky as if it’s a lottery. Okay. Even active managers who try to time the market go into extremes in complications just to be able to predict what the next nanosecond is going to be and they barely make money.

Matt Mulcock: Yeah. It’s such a good point, Rabih. The other thing that came to mind when you said that, that we probably should do a better job of, and we’ll do this today, right now is we, I think we say this a lot, like, we’ll be like, don’t time the markets. It doesn’t work, which I stand by. Don’t do it. It’s not, it doesn’t work, but I think maybe something we could do a better job of, and we’ll do this right now is okay.

Matt Mulcock: Well then what should I do? Like, what’s an alternative to timing the market? The alternative to timing a mark, the market is Actually have an investment philosophy, repeatable system for investing that you can stick with for a long time. Now we’re not going to be able to cover what that actually means like in detail today.

Matt Mulcock: But that is the opposite of timing. The market is have a belief system and a repeatable philosophy and investment system that you can stick to over time. We can give you ours in one sentence. We have a passive philosophy, right? We have a philosophy of kind of like you talk about like the Bogle heads, right?

Matt Mulcock: Indexing. We have a passive philosophy. But we have active implementation of that philosophy. So, okay. What does that mean? Again, how much time do you have? We kind of believe in marrying these two ideas of having, again, a kind of a foundation of being passive, of owning the market. But we implement it in an active way.

Rabih Dimachki: It’s like growing a tree, you know, you don’t go

Matt Mulcock: Tell me more about that.

Rabih Dimachki: It’s like growing a tree. You don’t go and pick up the leaves and try to, I don’t know, play with the fruits every single day in your portfolio. You just want to look at it and make sure it’s growing, but you don’t forget it for 30 years because it’ll die of dehydration or making sure you’re adding your fertilizer at the right time.

Rabih Dimachki: You are watering at the preset cadence, you know, and you are harvesting from it. The fruits one time are there for you to harvest, you know? So it’s, it’s not. Set it and leave it. There is an evidence based approach on how to grow a tree. And there’s an evidence based approach on how to grow a portfolio.

Rabih Dimachki: And this is it. Like you have to do an effort. But it is not too much that it’s harmful and it’s not too little that it’s also harmful due to neglect

Matt Mulcock: Yeah, I love that. And I was also thinking Rabih too. Sorry, we’re turning this into like an investment, strategy, episode. But what I was also thinking too, is it’s not necessarily that we don’t believe in timing, right? Like, I think we need to meet, we need to be maybe a little bit more specific about what we mean.

Matt Mulcock: Like we, our philosophy is we do believe that there’s certain times to, to implement maybe a buy and sell in, in a portfolio, or at least the managers that we work with and implement Rabih, you and I have talked about this before of certain things that we’re talking about with timing. I think the key here, when we talk about timing is what are you timing?

Matt Mulcock: What is the variable you’re using to time? are we talking about an event versus we are agnostic to events? We are looking at data and we’re saying. We’re looking at just pricing data. And we’re saying based on where prices are right now, supply and demand are different factors in the market.

Matt Mulcock: They, we might, we’re going to buy this anyway, but we actually might change up the timing of how we’re actually going to, how we’re actually going to implement it or do it. So I guess it’s maybe unfair to say we don’t believe in timing completely. But we don’t believe in timing in the traditional sense of someone out there being like, Oh my gosh, so and so is going to win the election.

Matt Mulcock: So I’m going to either wait and see, or I’m going to invest now. Like that’s the timing we don’t believe in.

Rabih Dimachki: Yeah. We’re not timing to predict the future as much as we are timing to balance risks. So if an asset class has a certain time until it converges to its long term average returns, we are going to have to match that to your timing as an investment horizon, like how much you, when will you need your investments?

Rabih Dimachki: And we’re going to be matching those timings together. And we’re going to be matching instead of. The timing of let’s predict the future. That’s the distinguishing.

Matt Mulcock: Love it. So I think that’s the last thing we’d say on this is we get it. We, again, we are empathetic to the fact that it feels comfortable. It feels like it makes sense and it feels intuitive to say that we could maybe time some things. or we could, again, the example I used is this wait and see approach.

Matt Mulcock: I hear so many times from people of like, I’m just going to wait and see who wins the election before I invest. And we understand that that’s a, seems intuitive, but it’s only going to hurt you. and then one thing I’d say on this, Rabih, there’s some data. I know you love yourself, some data.

Matt Mulcock: This is from the capital group. the reason I highlighted this one is because so many people do it. So many people try and try to time the market. So capital group gathered some data of net fund flows that they were comparing equity funds to money market funds. So, since 1992 to 2023. they’ve tracked net fund flows.

Matt Mulcock: So this is the money going into specific types of funds. So, and again, in the two broad categories they used were stock funds. So future funds that have a bunch of, you know, stocks in them, or just money market funds, basically think of like cash, the presidential election year since 1992 to 2023 in an election year, 195 billion. Flow into money market funds. So basically people just going to cash 37 billion going to equity funds. So again, a lot of people fleeing to cash waiting to see what happens the year after the election. Notice this is not saying Democrat or Republican just after the election for the last 20 years, 202 billion going to equity funds and only 85 billion going to money market funds. So again, think about the compounding impact that has. over a long period of time, Rabih, you’ve got thoughts

Rabih Dimachki: are two arguments here. There’s an argument of, Oh, people are balancing the risks, right? But then I would say, why is it in the year of right before an election is when you are deciding to balance your risk? The other argument, which I feel more inclined to, although we have data and we know that the market is agnostic and compounding is going to work the longer you stay in the market.

Rabih Dimachki: Even at a scale of billions, market participants are irrational. And they are going to act in a way where, Oh, I am sensing an uncertainty. I’m going to head to cash where the data tells you like, Oh, the data you shared with me is the data about the behavior of the individuals when they are investing.

Rabih Dimachki: It’s the order flow, but there’s also, even more robust sets of data that tells you about the performance. So which data do you want and will you be acting on your biases? So. Warren Buffett says it like the market as a whole is going to be acting irrationally at some points and this might be one of them that we under invest in election years and hopefully we marinate more in the data so we can overcome our behavioral biases.

Matt Mulcock: And we understand it feels scary. It does. You turn on the news or you get on Twitter or X or whatever you get on any social media. It feels scary. It like I joked at the beginning, it feels like no matter who wins, the world’s over.

Matt Mulcock: Cause that’s what both sides want to make you believe. when in reality, the sun’s going to come up. The market’s going to keep moving. People are going to keep getting up, trying to improve their lives. And hopefully if you’re invested in holding, like you’re staying in your seat, your portfolio is just going to keep doing its thing.

Matt Mulcock: So, okay. Those are the three myths, Rabih. So we’ll just, summarize here. Myth number one, your portfolio cares who wins the election. Your portfolio does not care. Myth number two, stocks don’t do well during an election year. The truth is it’s actually pretty normal, from year to year. myth number three.

Matt Mulcock: You can time the market based on the election. is you can time the market. No, you can’t, stay in your seat, have a philosophy, have a system focus on a long time horizon. Rabih, any final words of wisdom for the good people?

Rabih Dimachki: It’s personal wisdom actually, for fans of the show, they know that I recently became a US citizen and this is going to be the first time I ever vote in a US

Matt Mulcock: Oh my gosh. We should have started with that. I forgot. This is your first time.

Rabih Dimachki: totally fine. And I’m like super hyped about it. I even got called for jury duty already, which I’m like, Oh my goodness.

Matt Mulcock: You’re like excited. You’re excited.

Rabih Dimachki: Bleeding American right now, but, the, here’s the thing, people are worried about elections and, this very complex and stressful system that we have in this country. But I am super excited about it because this is the first time in my life. I’m actually voting in election that I feel even if most of the time they’re inconsequential for our lives and for markets, they do give you a sense that you’re in control of your destiny and that’s something to be cherished.

Rabih Dimachki: So honestly, I know it’s an election year and everyone is just pissed at each other, maybe because it’s my first year ever voting. I’m very hopeful about it. And I’m very happy about it.

Matt Mulcock: I love that Rabih. and I love talking to you about this kind of stuff. We obviously talk, we’ll talk politics and things like this off air all the time. You and I, and I love that you just said that. Cause I think you have such a, such a Refreshing opinion and take and perspective on things where I think for me, I fully admit I can get very siloed in like my natural born, born and raised in American kind of citizen type perspective.

Matt Mulcock: You always bring such a refreshing perspective on things like elections. And I love that you just said that, this kind of approach of gratitude of like guys. You don’t even understand the system works and like, you don’t even understand how incredible it is. I know I don’t.

Matt Mulcock: And we’ve talked so many times about things like social media and other things that you just bring such a global perspective. What I, that I really appreciate that we’re sharing to say like, Hey, this is a good thing. We should be so grateful no matter who wins that the system is working. So I love that.

Matt Mulcock: I think we’re going to leave it there, Rabih. That was amazing. So, everyone, thank you so much for listening. As always. thank you Rabih, for being here and sharing your wisdom and perspective. I love this. if you want to talk to us, if you want to share your story, see how we can help, please go to dentistadvisors.com.

Matt Mulcock: Click on the yellow book free consultation button. and if you wanna save a dentist, if you wanna save a dentist, life, share the show, share this episode, share the Dentist Money Show. we love. sharing our thoughts and hopefully adding value to your life. If we’re adding value to your life, share this with somebody, in the dental space or otherwise, my dad just listened to Rabih and he said, he listened to his first episode and said he loved it.

Matt Mulcock: So, share the show. Let us know what you think. Thanks everyone for listening until next time. Bye bye.

Keywords: election year investing, market uncertainty, investment myths, portfolio management, stock market performance, economic policies, diversification, political impact on markets

Finance 101, Investing, Market