The internet is all abuzz about Artificial Intelligence (AI). If you’ve tuned into any news show, website, or podcast in the last few months, chances are you’ve heard a story about AI. The clickbait titles range the gamut from the negative to the positive:

“AI Will Take Your Job!”

“AI: The Future of Healthcare”

“AI Could Be Humanity’s Last Invention”

“How AI is Revolutionizing Education”

This hot topic seems to have captured our collective imagination in a big way. But is AI going to save us or destroy us?

It shouldn’t surprise you to hear that our answer is “neither.” As with most issues the media blows up into larger stories, the answer is somewhere in the middle. No question, AI has some positive applications, and these are surely going to be a game-changer in certain fields. For example, AI-driven medical diagnostics have the potential to catch diseases earlier and more accurately than human doctors. In the realm of climate science, AI can help model and predict changes more precisely, aiding in the fight against global warming.

On the other hand, there are risks involved with AI. Concerns range from job displacement due to automation to ethical issues surrounding surveillance and privacy. High-profile voices in tech, such as Elon Musk and the late Stephen Hawking, have warned about the existential risks AI could pose if not properly managed. But that doesn’t mean it will sound the death knell for humanity.

What about AI and investing? One area where AI has not shown incredible promise is that of picking stocks. Don’t believe us? David Booth, from Dimensional Advisors, asked ChatGPT about investing, and the answer was basically “Do Not Trust ChatGPT.” This highlights a crucial point: while AI can process vast amounts of data and identify patterns that humans might miss, it doesn’t possess the intuitive judgment and foresight that experienced investors bring to the table.

Additionally, the stock market is influenced by a multitude of factors that are often unpredictable and driven by human emotions. AI, despite its advanced algorithms, can’t account for the whims and irrational behaviors of human investors. This is why, despite the potential of AI in many areas, it hasn’t revolutionized stock picking as some might have hoped.

How should we feel about AI and the future? Whatever your feelings are on AI, we believe it’s neither a reason to panic nor a reason to go all-in on an untested technology. There is an old saying in the investment world that the four most dangerous words are “This Time Is Different.” All the hype surrounding AI includes claims along those lines. It usually does not behoove investors to make big bets on the latest trends but rather to stay the course with one’s well-diversified portfolio, incorporating an overall asset allocation that matches their risk tolerance and time horizon.

AI represents a significant technological advancement with the potential to transform many aspects of our lives. Its impact will likely be complex, with both positive and negative elements. As we navigate this new landscape, it is crucial to approach AI with a balanced perspective, recognizing its capabilities while remaining vigilant about its risks. Just as with any other major innovation, the key lies in thoughtful and measured integration rather than succumbing to hype or fear.

Investing during an election year can be a source of anxiety for many investors. The potential for significant policy changes and the uncertainty surrounding election outcomes often lead to questions about how markets will react and what investors should do to prepare. Understanding historical trends and maintaining a disciplined approach can help alleviate some of these concerns.

Historical Market Performance During Election Years

Historically, markets have demonstrated resilience and even strength during election years. Since 1926, the S&P 500 index has averaged an annual return of just over 10%. Notably, during election years, this average return has been slightly higher at 11.6%. The year following an election also tends to perform well, with an average return of 10.7%. These figures suggest that while elections introduce a degree of uncertainty, markets often continue to perform robustly.

Volatility and Election Outcomes 

Contrary to what might be expected, historical data does not show a significant increase in market volatility during election years. Analyzing the standard deviation of the S&P 500, which measures market volatility, reveals that volatility is actually lower during election years compared to non-election years. The only period where increased volatility is evident is the month following the election. This suggests that while markets do react to election outcomes, the reaction is relatively short-lived.

Political Parties and Market Performance 

A common question is whether the market favors one political party over another. Historical data indicates that there is no clear pattern to suggest that markets perform better under Democratic or Republican presidencies. Various factors, including economic policies, global events, and broader economic conditions, have a more substantial impact on market performance than the political party in power.

Investor Behavior and Market Timing 

One of the most crucial points for investors to remember is the importance of staying invested and avoiding the temptation to time the market based on election outcomes. Trying to move investments in and out of the market in response to political events can be detrimental. Studies have shown that investors who attempt to time the market often end up underperforming due to selling low during downturns and buying high during recoveries.

Focus on Long-Term Goals and Asset Allocation 

Investors should focus on what they can control, such as their asset allocation and risk tolerance. Younger investors with a longer time horizon can afford to take on more risk, while those closer to retirement should consider reducing exposure to volatile assets like stocks. Ensuring a well-diversified portfolio that includes both domestic and international investments can also help mitigate risks. 

Elections undoubtedly introduce a layer of uncertainty into the market, but historical data suggests that maintaining a disciplined, long-term investment strategy is the best approach. By focusing on asset allocation, diversification, and staying invested, investors can navigate the volatility and continue to work towards their financial goals regardless of the political landscape.