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INVESTMENT FOCUS How will the Presidential Election Affect Your Investment Portfolio? HISTORY SAYS, NOT MUCH AT ALL Do presidential elections impact the market? Yes. But the data prove that, as the Bloomberg View puts it, “investors like election years, no matter who wins.”1 Since 1964, The S&P 500 Index gained 11 times, with winners beating losers 5.5 to 1.2 Only two election years, both of which witnessed extreme economic downturns, saw negative returns: the dot com bust of 2000 and 2008, the beginning of the worst recession in recent history. ANNUAL PERCENTAGE CHANGE IN S&P 500 INDEX, ELECTION YEARS 1964 TO 2012 30.0% 20.0% 25.8% 15.6% 13.0% 20.3% 19.1% 12.4% 7.7% 10.0% 4.5% 1.4% 0.0% 13.4% 9.0% -10.0% -10.1% -20.0% -30.0% -40.0% -50.0% -38.5% 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Percentages as of December 31 for each year Source: Standard & Poors It’s also important to note that, for the 39 years during this same period in which there were no presidential elections, the S&P went up 27 times and down only 12 times.3 No doubt this underscores that successful investing requires a long-term point of view. Winkler, Matthew A. “Investors Like Election Years, No Matter Who Wins.” Bloomberg View. August 1, 2016. Ibid. 3 Ibid. 1 2 MANAGED BY flexshares.com | Investing in Election Years and Beyond | 1 of 3 View Print Exit WHY CAN’T INVESTORS SIT BACK AND ENJOY THE RIDE? Because, often, partisan emotions get the better of them. Prognosticating “name” investors, economists, researchers and so-called investment gurus in the media who are focused on keeping and growing an audience all feed this very human attribute. In every election cycle you’ll find pundits “advising” investors to beware the effect on the market of various party platforms, or to focus on these sectors if Candidate A wins, and on those sectors if Candidate B wins, based on party pledges. Just Google the subject and you’ll see. But once a candidate takes office, campaign talk and party platforms don’t always match reality. To further sway emotional decisions, you’ll find other pundits say that, after the election, market performance will be influenced by such things as whether the incoming President will have both a Senate and House controlled by his (or her) party, swings in the federal deficit, or the President’s rising or falling approval ratings. Empirical evidence for such theories is basically nonexistent. Emotions often run high in presidential campaigns. Certainly, 2016 is no exception. Nor will be the next four to eight years of the new President’s term in office. Experienced advisors recognize that investment decisions based on emotions are the real problem. Regardless who is elected, the country will be nearly evenly divided on the outcome. Research shows that both groups are likely to adjust their portfolios to some degree based on November 8’s results. According to Time Magazine, “that’s when things really get risky.” 4 BIPARTISAN EXAMPLES ABOUND The danger of “confirmation bias” is very real. Many people, not just investors, are guilty of seeking out and interpreting information that confirms their preexisting beliefs or opinions, while giving much less consideration to alternative thinking. A lot of investment opportunities have been lost due to this type of “selective memory.” Some readers may remember these headline-making opines: ● A renowned economic adviser to Bill Clinton insisted that President George W. Bush’s 2003 tax cuts would be near-disastrous for new-economy companies.5 Investors who turned a deaf ear doubled their money in tech stocks across the next four years. ● In early 2009, a highly regarded Stanford professor of economics and former Chairman of George H.W. Bush’s Council of Economic Advisers argued that President Obama’s policies were “killing the Dow.”6 He is not quoted, however, explaining the Dow’s rise of more than 11,000 points in the last eight years. WHAT SHOULD INVESTORS DO? Remember that, for most of us, investing is — and should be — a long-term endeavor. Don’t become guilty of obsessing on the possible outcomes of the next few years, regardless of who wins. Instead, apply a goal-oriented, disciplined investment methodology and hold to the long-term view that the market does indeed go up and down across time. Tepper, Taylor. “How the Election Will Really Affect Your Investments.” Time.com/Money. June 22, 2016. Stiglitz, Joseph E. “Bush’s tax Plan—The Dangers.” The New York review of Books. March 13, 2003. 3 Boskin, Michael J. “Obama’s Radicalism Is Killing the Dow.” The Wall Street Journal. March 6, 2009. 1 2 MANAGED BY flexshares.com | Investing in Election Years and Beyond | 2 of 3 Home View Print Exit Contact FlexShares at 1-855-FlexETF (1-855-353-9383) or visit flexshares.com if you have questions on real assets or to learn more about any of the FlexShares family of ETFs. Some specific examples of ways to ride the potential turbulence of the new President’s term: Don’t forget the basics: depending on your goals, time horizon and risk tolerance, make sure you do your homework on any changes or additions to your portfolio based on your parameters and not those in the news. Wait and see: consider Warren Buffett’s advice about being “fearful when others are greedy and greedy when others are fearful.” You may want to hold off on major portfolio decisions until the election dust settles. If you see investors rushing away from certain sectors (or the market as a whole) based on their own “confirmation bias,” be ready to consider capitalizing on a potential downturn. Play defense: The current bull market celebrated its seventh birthday this past March and, if it continues till next April 2017, it will be the longest lasting in history.7 It can’t last forever. If you feel a correction is coming soon, look for sectors that are not dependent on a flourishing economy, such as healthcare. Or, you may want to assess adding an emphasis on dividend-paying stocks. For instance, you may want to consider an ETF like the FlexShares Quality Dividend Index Fund suite (ticker symbols: QDF, QDYN, QDEF), which is designed to vet dividend stocks via a sophisticated multifactor analysis to potentially deliver only quality-rated companies. FLEXSHARES CAN HELP ETFs have a unique ability to provide broad coverage of major indexes, industry sectors or asset classes at very low cost. Beyond low expense ratios, they also offer a high level of liquidity and tax efficiency. We encourage all investors to consider ETFs as part of their core holdings in a diversified portfolio strategy. If you would like to learn more about Exchange Traded Funds in general or the many funds available to you in the FlexShares family of ETFs, please don’t hesitate to call us at 855-FlexETF (855-353-9383), or visit www.flexshares.com. IMPORTANT INFORMATION Before investing, carefully consider the FlexShares investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.flexshares.com. Read the prospectus carefully before you invest. FlexShares ETFs are distributed by Foreside Fund Services, LLC, not affiliated with Northern Trust. An investment in FlexShares is subject to investment risk, including the possible loss of principal amount invested. Funds’ returns may not match the returns of their respective Indexes. The Funds may invest in emerging and foreign markets, derivatives and concentrated sectors. In addition, the Funds may be subject to asset class risk, small-cap stock risk, value-investing risk, non-diversification risk, fluctuation of yield, income risk, interest rate/maturity risk, currency risk, passive investment risk, inflation-protected security risk, market risk and manager risk. For a complete description of risks associated with each Fund, please refer to the prospectus. FlexShares Quality Dividend Index Fund (QDF), FlexShares Quality Dividend Defensive Index Fund (QDEF) and the FlexShares Quality Dividend Dynamic Index Fund (QDYN) are passively managed and use a representative sampling strategy to track their underlying index. Use of a representative sampling strategy creates tracking risk where the Fund’s performance could vary substantially from the performance of the underlying index. Additionally, the Funds are at increased dividend risk, as the issuers of the underlying stock might not declare a dividend, or the dividend rate may not remain at current levels. The Funds are also is at increased risk of industry concentration, where it may be more than 25% invested in the assets of a single industry. Finally, the Funds may also be subject to increased volatility risk, where volatility may not equal the target of the underlying index. MANAGED BY flexshares.com | Investing in Election Years and Beyond | 3 of 3 FS 00088 Home View Print Exit