Riding Out the Election Storm
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Barack Obama was just reelected as president of the United States, the GOP retained control of the House of Representatives, and the Democrats are still in the majority in the Senate. Some say that the perception of continued government gridlock will result in the country going over the "fiscal cliff" next year.
This situation was blamed for the decline in the stock market the day after the election. Others said that ongoing problems in Europe were to blame. Whatever the reason, the Dow Jones Industrial Average dropped by almost 300 points. Other major market indices also dropped significantly.
I'm sure that there will be lots of volatility in the coming weeks. Expect wild swings in the market, and I'm sure many rumors will be flying around on a daily or even hourly basis as we near the cliff. So what should the individual investor do? My advice is to be patient and continue what you have been doing. And if you were doing the right thing then it will probably keep paying off. Alternatively, if you were not doing the right thing, that will probably continue.
I'll look back at another election, and throw in a severe financial crisis for good measure, and see how it may have impacted investment performance.
The 2000 election contest between George W. Bush and Al Gore was not decided for 37 days following the actual voting. A lawsuit filed as the result of disputed results in the state of Florida (remember the hanging chads?) wound its way through the legal system before finally being settled by the U.S. Supreme Court. Mr. Bush became the 43rd president.
The stock market dropped 3% between Election Day and Dec. 13, 2000, when the results were finalized, and dropped a further 7% over the next week. Was it due to the election, or was it a continuation of the bursting of the "dot-com" bubble? Since Mr. Bush became president the market averaged only a 2% increase per year, lagging behind inflation.
Instead of buying the market, a better choice might have been to buy and hold individual stocks. But with this strategy could you have survived both the drawn out election and the 2008 recession?
If you had invested in solid companies, with good fundamentals such as steady earnings growth and consistently increasing dividend payouts, and held over a long period of time, you would have been in good shape.
For example, if you had bought the pharmaceutical giant Johnson and Johnson (NYSE: JNJ) on Nov. 8, 1999, held until today and included dividends, you would have beat the market by about 3 to 1. The company, whose products include Tylenol and Band-Aids, has a decades-long history of paying and increasing dividends.
Another good investment would have been Procter and Gamble (NYSE: PG). The maker of Tide, Pampers, and Gillette razors also has a great record of paying and increasing dividends over many years. Since Nov. 1999 your P&G investment would have gained 71%, or about 42% more than the market.
The Coca-Cola Company (NYSE: KO) would have also paid off for you. The beverage maker, around since the late 1800's and owner of the world's best known brand name, has been paying a dividend since 1920 and has increased it every year for the last half century. An investment in Coke would have gained about the same as P&G, beating the market by a wide margin.
A 4th "storm-rider" is United Technologies (NYSE: UTX). The aerospace and building systems conglomerate is a member of the Dow Jones Industrial Average and a dividend payer since the 1930's. The supplier of the astronaut's space suits, Pratt & Whitney jet engines, Otis elevators ,and Carrier air conditioners would have been a great performer for your portfolio. It bested the market by a factor of 8:1.
If you had decided to go tech instead and looked at what you thought was a solid company, you would have been disappointed. An investment in Microsoft (NASDAQ: MSFT) would have underperformed all of the companies discussed above, as well as the market. And you would have actually lost money. The supplier of Windows and other software products was a high flyer throughout the 1980's and 1990's and became the world's most valuable company by market cap. However, once the bubble burst it and many other tech companies crashed back to earth. A possible reason was that it was overpriced relative to its fundamentals.
In conclusion, I recommend to you to ignore the day-to-day hype about the election and the fiscal cliff and whatever other problems that may be out there. Look for those companies that have proven themselves to be successful during uncertainty and bad times. You will stay afloat during the turbulence and be pleasantly surprised that you haven't gone under.
Mathman6577 owns shares of United Technologies, Johnson & Johnson, The Procter & Gamble Company, and The Coca-Cola Company. The Motley Fool owns shares of Johnson & Johnson and Microsoft. Motley Fool newsletter services recommend Johnson & Johnson, The Coca-Cola Company, Microsoft, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.