In the coming months before the 2004 Presidential Election, each candidate will likely argue that their economic policies will be best for the U.S. economy. While no one can accurately predict the results of the election or its effects on the economy, history may shed some light on what effect a Democrat or Republican may have, using history as a guide, on the stock market and your investment portfolio.

To the surprise of many investors, history reveals that the stock market often has done better when there is a Democrat residing in the White House. In the past, there may have been a misconception that “anti-business”, “free-spending” Democrats were bad for investors, while “pro-business”, “fiscally responsible” Republicans would guarantee solid returns.

Stock versus Bonds

According to the “Stock Trader’s Almanac,” since 1901 the Dow Jones industrial average has returned an average of 6.4 percent under Republican presidents and 9.1 percent under Democrats. In fact, some of the stock market’s darkest days have been during Republican presidencies – thecrashes of 1929 and 1987 as well as the bear market from 1969 to 1974. On the other hand, some of the biggest runs during the 1960’s and 1990’s came with Democrats in the office.

However, quite the opposite is true for bonds. The bond market has historically fared much better under Republican presidencies. For example, long-term Treasury bonds returned an average of 9.5 percent per year under Republican presidents and only 2.8 percent under Democrats. There are some potential explanations for this phenomenon. Generally speaking, Democrats since Franklin D. Roosevelt have often focused on encouraging demand through deficit spending, creating more entitlement programs, increasing and extending unemployment benefits and increasing the minimum wage. Programs like these are normally better for stocks and bad news for bonds. Republicans, in general, have tended to favor fiscal responsibility, smaller government, combating inflation and using interest rates as a lever to spur economic growth, which usually helps the bond market.

Politics and Financial Decision-Making

While it may be interesting to learn that the stock market has historically done better under Democratic presidents and bonds have often improved under Republican presidents, it is most important to remember that you shouldn’t make investment decisions based on which party is in the White House. Instead, you should manage your investments focused on two most important factors, your time frame and your desired financial goals. Consider following these helpful tips to build and manage your portfolio, despite which party ultimately holds office: Utilize Dollar-Cost-Averaging

Investing money on a scheduled basis, perhaps monthly or quarterly, is often a smart way to help your investments grow. Dollar-cost-averaging is a long-term investing strategy in which you invest the same amount at regularly scheduled intervals, regardless of market prices, helping you by purchasing more shares when prices are low and fewer when prices are high.

Diversify Your Investments

Diversification, or spreading your money across several different investments and investment classes, helps reduce market risk in a portfolio and can help protect your nest egg. As stocks and bonds often move in opposite directions, you can reduce your portfolio’s volatility by owning both. Because they invest in many different securities, mutual funds can be a great way to diversify. And remember not to over-invest in your employer’s stock. If your company should go bankrupt or the stock plummets, you might not only lose your paycheck but your nest egg as well.

Rebalance Your Portfolio

Rather than changing your investment mix every day like in the “day trading” world, which can be very risky, or guessing which way the market will go based on whether a Democrat or Republican is in office, you may instead want to review your portfolio approximately once a year to make sure your chosen asset allocation is still balanced and right for your needs. Rebalancing can help you keep your portfolio on track with your long-term goals.

Seek Help

What are your financial goals? How much time to do you have to reach these goals? These are some of the important questions you should be focused on. Meeting with a qualified financial advisor can help you answer these questions and build a comprehensive portfolio and investment strategy specifically for your needs.

Investments are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, may be worth more or less than the original investment.

“It’s Your Future” appears weekly in the UP. Send questions about money management to Financial Advisor James Barr at james.b[email protected] and he will try to answer them in future columns.