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How a U.S. Election Could Impact Your Long-Term Investment Goals

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U.S. election performance

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How a U.S. Election Could Impact Your Investment Goals

When constructing a financial plan, it can seem like there are a million things to consider. Your life expectancy, the return needed to reach your goals, and your risk tolerance all play a role. In addition, short-term events like the U.S. election can influence the volatility in your portfolio.

In today’s infographic from New York Life Investments, we outline the factors threatening individuals’ retirement savings, and how a U.S. election has historically impacted investments.

A Precarious Future

In recent years, a variety of factors have increased longevity risk—the possibility that individuals will outlive their retirement savings.

Little Savings, Low Yields
A quarter of working Americans have no retirement savings, and 44% feel their savings are not on track.

What’s more, investors now face a low yield environment, affecting their ability to save. From its peak of over 15% in the early 1980s, the U.S. 10 Year Treasury Yield now sits below 2%.

Longer Lives, and More Retirees
With a higher life expectancy today than in previous generations, Americans need to save for a longer retirement. What’s more, the aging U.S. population will peak within the next few years—creating even more urgency.

At the other end of the working life scale, millennials will make up 75% of the global workforce by 2025. To avoid the same issues as baby boomers, they will need to set a strong retirement savings foundation from the start.

Layered Uncertainty
In 2020, the uncertainty of the U.S. election further complicates these longevity issues. With the political divide growing, heated opinions have dominated headlines—and many experts are predicting market volatility.

U.S. Elections and Market Performance

However, volatility doesn’t necessarily mean poor performance. In fact, it has generally translated to positive returns in election years. In the 23 election years since 1928, only four years have seen negative returns.

S&P 500 Stock Market Returns During Election Years

YearReturn
192843.6%
1932-8.2%
193633.9%
1940-9.8%
194419.7%
19485.5%
195218.4%
19566.6%
19600.5%
196416.5%
196811.1%
197219.0%
197623.8%
198032.4%
19846.3%
198816.8%
19927.6%
199623.0%
2000-9.1%
200410.9%
2008-37.0%
201216.0%
201611.9%
The average return during these years was 11.3%.

Sector Performance

An incoming administration’s policies have the potential to sway market segments and sector returns. For instance, sector dispersion increased substantially around the 2016 election.

Which sectors have done well historically?

From the beginning of the 2008 election year to the end of the Obama administration, the S&P 500 Health Care Index increased by 103%, compared to the 55% increase in the S&P 500 Index over the same period. It is possible that Obama’s pro-health policies contributed to the sector’s growth.

From January 2016 to January 2020, the S&P 500 Aerospace and Defense Select Industry Index increased by 143% compared to the 72% increase in the S&P 500 over the same period. The Trump administration has increased defense budgets and deals, which may have contributed to the sector’s strong returns.

What About Bonds?

Historically, bond returns tend to be lower than stocks—and election years are no different.

Bond and Stock Returns During Election Years

YearU.S. Aggregate Bond*S&P 500Difference
19802.71%32.50%-29.79%
198415.15%6.27%8.88%
19887.89%16.61%-8.72%
19927.40%7.62%-0.22%
19963.64%22.96%-19.32%
200011.63%-9.11%20.74%
20044.34%10.88%-6.54%
20085.24%-37.00%42.24%
20124.22%16.00%-11.78%
20162.65%12.00%-9.35%

*U.S. Aggregate Bonds represented by the Bloomberg Barclays U.S. Aggregate Bond Index.

During these years, the median average annual return for bonds was 4.79% compared to 11.44% for stocks. Bonds have provided important diversification and risk management during market downturns. However, upside returns are generally more limited.

Reaching Investment Goals

While historical performance helps us understand the big picture, returns during the 2020 election could vary widely.

Instead of trying to time the market, Americans can keep a long-term focus and, if suitable, consider investing more heavily in equities—a powerful option in the current low rate environment. This may help investors manage longevity risk, and potentially build a sufficient nest egg for retirement.

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What is Defined Outcome Investing?

Defined outcome investing is a customizable solution that investors of all mindsets can use to add a layer of predictability to their results.

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What is Defined Outcome Investing?

Equities can play a critical role in any investment portfolio thanks to their long-term growth potential. At the same time, this asset class can also present a number of challenges for investors.

Uncertainty around the short to mid-term performance of equities can be a major deterrent for some, while others may find it difficult to select the best stocks based on their unique needs. Fortunately, there is a solution that can help investors overcome these challenges. In today’s infographic from New York Life Investments, we introduce defined outcome investing, and examine how it can help individuals take more control over their equity investments.

Understanding How DOI Works

Defined outcome investing (DOI) is a family of strategies that add a layer of predictability to an investor’s results. This is achieved through two unique aspects.

The first is a customizable risk-return profile, which gives investors the option of receiving either upside enhancement or downside protection features.

Risk-Return FeatureHow it Works
Upside enhancementEnhances the returns of the specified index, up to a cap. The investor is not sheltered from negative returns.
Downside protectionProtects investors from negative returns, up to a certain amount. The investor still participates in market upside, up to a cap.

The second aspect is a predetermined time period—defined outcome strategies carry a maturity date, similar to a fixed income security. Upon reaching its maturity date, a defined outcome strategy expires and the proceeds are paid out to the investor. This feature makes it easier for an investor to time their equity exposures around personal liquidity needs.

To understand the potential of DOI, consider a woman who wishes to make a down payment on a property one year from now. She would like to invest and grow her money in the meantime, but is worried about market volatility. Rather than purchase individual securities or ETFs, she could opt for a defined outcome strategy with downside protection over a one year term.

These features would reduce the likelihood of negative returns over the year, while still giving her exposure to the growth potential of equities.

Types of Defined Outcome Strategies

Investors have three distinct types of defined outcome strategies to choose from, depending on their personal objectives.

Growth Strategies

Growth strategies are designed for investors who:

  • Have a positive outlook on markets
  • Seek high levels of capital appreciation
  • Accept the possibility of negative returns

As implied by their name, these strategies produce enhanced market returns. They do not, however, offer any downside protection. The table below demonstrates how a growth strategy with 50% upside enhancement would perform across a number of scenarios. Assume a maximum return cap of 36%.

Market ScenarioS&P 500 Return (via ETF)Growth Strategy Return Defined Outcome Result
Strongly Positive50%36%Investors reach their maximum return cap of 36%.
Positive20%30%Investors gain 10 percentage points over the index.
Modestly Positive8%12%Investors gain 4 percentage points over the index.
Negative-10%-10%Investors match the index's negative return.

Buffered Strategies

Buffered strategies are a more neutral solution designed for investors who:

  • Have a moderate outlook on markets
  • Seek capital appreciation
  • Require a safety buffer to mitigate losses

Buffered strategies allow investors to participate in equity markets while receiving a specified level of insulation from negative returns. The table below demonstrates how a buffered strategy with 20% loss insulation would perform across a number of scenarios. Assume a maximum return cap of 24%.

Market ScenarioS&P 500 Return (via ETF)Buffered Strategy ReturnDefined Outcome Result
Strongly Positive30%24%Investors reach their maximum return cap of 24%.
Positive8%8%Investors match the positive return of the index.
Negative-20%0%Investors are sheltered from losses within their buffer.
Strongly Negative-30%-10%Any losses beyond the buffer are realized by the investor.

Preservation Strategies

Preservation strategies are best suited for risk-averse investors who:

  • Have a negative outlook on markets
  • Want to manage downside risk
  • Have significant financial obligations in the near future

Preservation strategies provide a different type of downside protection where, instead of a buffer, investors define their maximum loss. The table below demonstrates how a preservation strategy with 95% capital preservation (5% maximum loss) would perform across a number of scenarios. Assume a maximum return cap of 20%.

Market Scenario S&P 500 Return (via ETF)Preservation StrategyDefined Outcome Result
Strongly Positive30%20%Investors reach their maximum return cap of 20%.
Positive8%8%Investors match the positive return of the index.
Negative-3%-3%Investors match negative returns within their maximum loss.
Strongly Negative-30%-5%Investors maintain 95% of their capital.

Accessing Defined Outcome Strategies

Defined outcome strategies are accessed through a vehicle known as a unit investment trust (UIT). UIT’s offer similar levels of transparency and accessibility when compared to ETFs or mutual funds, including daily liquidity and transparency of holdings. So how are they able to offer such compelling risk-return features?

The answer lies in their use of equity options, a type of derivative contract. Equity options give the holder, in this case the UIT, the option of buying (or selling) a stock at a predetermined price on a specific date in the future. These contracts are used to engineer the risk-return features previously described, and are the reason why defined outcome strategies carry a maturity date.

Thus, in order to realize the specified upside enhancement or downside protection features, an investor must hold the UIT for its entire term. While there is no penalty for redeeming a UIT early, the investor will not reach their defined outcome objective.

A More Predictable Approach to Investing

Equities are a powerful tool for long-term growth, but it can be difficult to build a properly-aligned portfolio according to one’s risk tolerance. This becomes especially relevant in today’s uncertain economic environment.

With customizable risk-return profiles and a defined maturity date, defined outcome investing is a powerful solution that can support a variety of financial goals through different phases of the market cycle. Whether its maximizing returns or saving for retirement, investors can now take greater control over their financial future.

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Infographics

Financial Wellness: How to Be Resilient During a Crisis

Even prior to COVID-19, only about 28% of U.S. adults were financially healthy. Here’s how you can improve your financial wellness during a crisis.

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Financial Wellness: How to Be Resilient During a Crisis

Due to the COVID-19 pandemic, 90% of Americans feel anxious about money. These stress levels are the same across all income groups.

Unfortunately, financially-stressed people are more likely to face physical and mental health challenges. For example, people with high debt stress during the 2008 financial crisis had higher levels of back tension, severe depression, and anxiety.

In today’s infographic from New York Life Investments, we take a look at the current state of financial health, and highlight ways people can improve their financial wellness during a crisis.

A Current Snapshot

Financial health is the degree to which people are able to be resilient and take advantage of opportunities over time. It rests on eight indicators:

  • Spend: Spend less than income and pay bills on time
  • Save: Have sufficient liquid savings and long-term savings
  • Borrow: Have manageable debt and a prime credit score
  • Plan: Have appropriate insurance and plan ahead financially

Based on these factors, individuals fall along a spectrum of financial health. In the U.S., only about 28% of people were considered to be financially healthy in a 2019 study.

Clearly, many Americans were already facing challenging circumstances prior to the pandemic. Here are a couple of the top issues.

More Complexity

Finances have become more complicated over time.

For many years, workers could rely on defined benefit pension plans that paid a set amount in retirement. In recent decades, pensions have primarily shifted to defined contribution plans. These require the employee to make investment decisions and build their own nest egg.

Unfortunately, financial education has not kept pace with the rising need for knowledge. Fewer than half of U.S. states require high school students to take a course in personal finance.

“Money Talk” Taboo

To build financial literacy, individuals would benefit from talking more openly about money. However, 44% of Americans surveyed would rather talk about religion, death, or politics than discuss personal finance with a loved one.

Fears of embarrassment and conflict are major emotional roadblocks that hamper financial progress. What can individuals do to improve their financial wellness, especially during a crisis?

Building Resiliency

People can follow a step-by-step strategy to optimize their financial situation.

  1. Assess their current situation.

    Uncertainty can be a major source of anxiety. To identify the source of stress—and determine if it’s warranted—investors can take stock of their income, expenses, savings, and debts.

    Financial self-awareness is positively associated with greater financial satisfaction, and stronger spending and investing decisions.

  2. Prepare for the worst-case scenario.

    What can individuals do if they lose their job or see a prolonged drop in retirement savings?

    Investors can consider various options, such as taking on freelance work, cutting unnecessary expenses, or increasing retirement plan contributions. Then, they can “stress test” their financial plan to account for these scenarios and begin preparing as best they can.

  3. Break goals into small chunks.

    Specific, achievable, and measurable goals are easier to manage. For example, rather than having a goal to pay down $51,000 in debt, an individual could aim to make monthly payments of $850 over five years.

    By setting smaller goals, investors can take action to make progress. Research has shown that achieving quick wins makes people more likely to achieve their financial goals.

  4. Improve financial knowledge and openness.

    Investors can educate themselves as much as possible—people with high investment knowledge are proven to be more prepared and less anxious.

     Has planned for retirementFeels anxious when thinking about personal financesHas emergency savings
    Low Investment Knowledge62%48%78%
    High Investment Knowledge73%21%90%

    People can also take steps to break financial taboos with loved ones, by starting with simple conversations about experience and building to more concrete discussions about family finances. The ability to talk about money is one of the most important skills for building financial literacy.

  5. Create long-term, purposeful goals.

    Setting the right goals helps investors define their own parameters for success, which in turn keeps them focused and motivated. It’s also important to monitor goal progress regularly, to allow for portfolio or contribution adjustments as needed.

Taking Charge

Financial crises can strike at any point in time, whether it’s due to personal circumstances or an economic downturn.

To improve their situation, people can focus on the controllable elements of financial health: spending, saving, borrowing, and planning. This allows investors to emerge with a stronger, more resilient plan than they had before the crisis.

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