7 Investing Myths That Could Cost You During Election Season

What the midterm elections, today's bull market, and decades of investing history can teach us about making better financial decisions.

Elections, Bull Markets, and Investor Anxiety

With the 2026 midterm elections approaching, investors have plenty of reasons to wonder what might happen next.

Will Republicans or Democrats control Congress? Could changes in government policy affect the economy? Will the stock market respond favorably to the election results, or could political uncertainty lead to increased volatility?

At the same time, another question is becoming increasingly common:

How much longer can the current bull market continue?

After several years of market gains, some investors are beginning to wonder whether the next significant downturn is just around the corner.

These are reasonable questions. After all, elections can influence tax policy, government spending, regulations, and other issues that affect businesses and households.

And bull markets certainly don't last forever.

But there's an important distinction between recognizing uncertainty and making investment decisions based on predictions about what might happen next.

The Danger of Investing Based on Headlines

Every election cycle brings a new collection of forecasts, opinions, and concerns about the future.

Some commentators predict that a particular election outcome will be positive for stocks.

Others warn that the same outcome could lead to economic weakness or declining markets.

Meanwhile, investors hear conflicting predictions about inflation, interest rates, corporate earnings, and the possibility of a recession.

With so many competing opinions, it's understandable that some investors consider moving money into cash, changing their investment allocations, or waiting until the uncertainty passes.

But what if some of the assumptions behind those decisions are incorrect?

What if election results aren't as important to long-term investment performance as many investors believe?

What if a bull market's age tells us less about its future than the underlying health of the economy?

And what if waiting for greater certainty actually introduces financial risks of its own?

These questions bring us to a larger issue: Some of the most common investing mistakes begin with beliefs that sound reasonable but don't always hold up when examined against history.

Looking Beyond the Headlines

Recent research from Capital Group and Invesco offers two useful perspectives.

Capital Group's analysis of midterm elections suggests that political uncertainty can influence short-term market behavior, but historical stock returns have been relatively strong following midterm elections.

Meanwhile, Invesco's recent research suggests that although inflation, borrowing costs, and credit-market conditions deserve attention, the current bull market may still have room to continue.

Neither conclusion guarantees what happens next.

However, both reinforce an important lesson: Investors should distinguish between temporary uncertainty and the underlying factors that drive long-term investment performance.

In this edition of the Planning Playbook, we'll examine seven common investing myths, using historical market data and today's economic environment to separate reasonable concerns from potentially costly misconceptions.

The goal isn't to predict the next election result, recession, or market downturn. It's to make informed investment decisions that can help you build and preserve wealth regardless of what happens next.

Myth #1: Election Results Determine Stock Market Performance

Every election cycle, investors hear predictions about what will happen to the stock market depending on which political party wins.

Some believe Republican leadership is better for business and the economy. Others believe Democratic leadership produces stronger investment returns.

And when control of Congress is uncertain, it's easy to assume that the stock market will struggle until the political landscape becomes clearer.

But does history support those assumptions?

What History Tells Us About Midterm Elections

Midterm elections occur halfway through a president's four-year term, often creating the possibility of a shift in control of the House of Representatives, the Senate, or both.

These elections can have meaningful implications for government spending, taxes, regulation, and the likelihood of major legislation being passed.

However, the historical relationship between midterm elections and stock market performance may surprise investors.

According to research from Capital Group, the S&P 500 has historically averaged approximately 15% in the 12 months following midterm elections since 1950.

That doesn't mean stocks will necessarily rise following the 2026 election. Historical averages can conceal significant differences between individual election cycles, and past performance doesn't guarantee future results.

But the research challenges the idea that election uncertainty necessarily leads to poor investment performance.

In fact, markets have often performed well after elections, even when the political outcome was contentious or resulted in divided government.

Does It Matter Which Political Party Controls Washington?

Political leadership can influence the economic environment.

Changes in tax policy, government spending, energy policy, healthcare regulations, and international trade can affect individual companies and industries.

But the stock market is influenced by far more than the political party controlling Congress or the White House.

Consider some of the factors that affect stock prices:

• Corporate earnings and profitability.

• Economic growth and consumer spending.

• Inflation and interest rates.

• Business investment and productivity.

• Technological innovation.

• Investor expectations about future economic conditions.

These factors don't disappear when political leadership changes.

Businesses continue to develop products, serve customers, improve efficiency, and pursue opportunities regardless of which party controls Washington.

And while certain policies may benefit some industries more than others, predicting which companies will ultimately outperform based on an election result can be extremely difficult.

Why Divided Government Isn't Necessarily Bad for Investors

One potential outcome of the 2026 midterm elections is divided government, where different political parties control the presidency and at least one chamber of Congress.

Some investors view this as a negative because it can make passing legislation more difficult.

Others view it positively because major policy changes may become less likely.

The reality is that divided government can create both opportunities and challenges.

It may limit the likelihood of sweeping legislative changes, but it can also make addressing budgetary, fiscal, or economic issues more complicated.

For investors, the more important question may be whether businesses can continue growing earnings and whether economic conditions remain supportive.

A divided Congress doesn't automatically mean a weak stock market, just as unified government doesn't guarantee strong returns.

The Risk of Letting Political Preferences Influence Your Portfolio

One of the more common investing mistakes is allowing personal political opinions to influence long-term financial decisions.

An investor may feel optimistic about the economy when their preferred political party is in power.

That same investor may become pessimistic when the opposing party wins.

But personal political preferences and investment fundamentals are two very different things.

Imagine an investor who moves a significant portion of their retirement savings into cash following an election because they believe the new political leadership will be harmful to the economy.

If the stock market continues rising, that investor may miss meaningful investment gains while waiting for the predicted downturn.

Even if the market eventually declines, they still face another difficult decision: when to reinvest.

This is why I believe investment decisions should be based on financial goals, time horizons, risk tolerance, portfolio valuations, and economic fundamentals rather than political predictions.

That doesn't mean ignoring government policy.

It means recognizing that political outcomes are only one piece of a much larger investment picture.

What This Means for Your Investment Strategy

As we approach the 2026 midterm elections, investors should expect plenty of political commentary and market predictions.

Some of those predictions will eventually prove correct.

Others won't.

Rather than trying to position an entire portfolio around a particular election outcome, investors may be better served by maintaining a diversified investment strategy designed to navigate different economic and political environments.

That includes reviewing investment allocations, understanding portfolio concentration, and making adjustments when financial circumstances or long-term objectives change.

The lesson: Elections can influence markets, but they don't determine your financial future. A disciplined investment strategy should be built around your long-term goals—not which political party wins the next election.

Myth #2: A Bull Market Must Be Near Its End Because It's Been Going Up for Years

One of the most common concerns investors express after several years of strong stock market performance is that the market must be approaching a significant downturn.

After all, stocks can't keep going up forever.

And that's true.

But there's an important distinction between recognizing that markets experience cycles and assuming a bull market is about to end simply because it has lasted several years.

Bull markets don't have expiration dates.

What Actually Ends a Bull Market?

A bull market is generally defined as a period when stock prices rise at least 20% from a previous market low.

A bear market, on the other hand, is typically associated with a decline of 20% or more from a recent market high.

While these definitions help investors identify market cycles, they don't explain what causes those cycles to change.

Historically, major market downturns have often been associated with deteriorating economic conditions, financial instability, or significant changes in investor expectations.

Some of the warning signs investors may want to monitor include:

• Economic growth: Is the economy continuing to expand, or are businesses and consumers beginning to pull back?

• Corporate earnings: Are companies growing profits, or are earnings expectations deteriorating?

• Inflation: Is inflation moving toward a more sustainable level, or could persistent price pressures create additional challenges?

• Interest rates: Are borrowing costs supporting economic activity, or are they becoming increasingly restrictive?

• Credit conditions: Are businesses and consumers continuing to access financing, or are lenders becoming more cautious?

These factors don't provide a perfect formula for predicting the next bear market.

However, they can offer a more useful perspective than simply counting how many years stocks have been rising.

Why Credit Conditions Matter

One of the more interesting points in Invesco's recent research is the importance of monitoring credit markets.

Credit conditions can provide valuable insight into the financial health of businesses and the broader economy.

When companies can borrow money at reasonable rates, they may be better positioned to invest, expand operations, hire employees, and manage existing debt.

But when borrowing becomes more expensive or lenders become less willing to extend credit, financial pressure can begin to build.

This can be particularly challenging for businesses carrying substantial amounts of debt.

For example, a company that borrowed money several years ago at relatively low interest rates may face significantly higher financing costs when that debt matures.

If the company's earnings have also weakened, refinancing could become more difficult.

Now imagine similar challenges affecting businesses across multiple industries.

As financial conditions tighten, companies may reduce spending, delay expansion, or cut jobs.

Those decisions can eventually affect consumer spending, economic growth, and corporate profitability.

That's why broad deterioration in credit conditions can be an important warning sign for investors.

However, isolated financial difficulties don't necessarily mean the entire economy is heading toward a recession.

The key is determining whether those problems remain contained or begin spreading throughout the financial system.

What About Inflation and Interest Rates?

Inflation and interest rates also play important roles in determining how long an economic expansion may continue.

When inflation remains elevated, the Federal Reserve may need to maintain higher interest rates to help control price increases.

Higher rates can make borrowing more expensive for businesses, homeowners, and consumers.

They can also influence stock market valuations because investors may demand higher expected returns from stocks when bonds and other investments offer more attractive yields.

But higher interest rates don't automatically mean a recession or bear market is imminent.

An economy may continue growing despite elevated borrowing costs, particularly when employment, consumer spending, productivity, and corporate earnings remain relatively healthy.

Conversely, falling interest rates aren't always a positive signal.

Sometimes rates decline because inflation is moderating and economic conditions are stabilizing.

Other times, the Federal Reserve reduces rates in response to weakening economic activity.

The direction of interest rates matters, but understanding why they're moving can be even more important.

Can Stocks Continue Rising Even When Valuations Are High?

Another concern investors frequently raise is that stock prices have become too expensive.

And valuation absolutely matters.

When investors pay higher prices relative to corporate earnings, future investment returns may become more dependent on continued earnings growth and optimistic expectations.

That can create additional risk if companies fail to meet those expectations.

But expensive stocks don't automatically become cheaper simply because valuations are elevated.

Consider a company whose stock price has increased significantly over several years.

If the company's earnings are also growing rapidly, some of that stock price appreciation may be supported by improving business fundamentals.

On the other hand, if stock prices rise much faster than earnings, valuations may become increasingly difficult to justify.

This is why I believe investors should distinguish between a market that has gone up significantly and a market whose underlying fundamentals no longer support its valuation.

Those aren't necessarily the same thing.

Why Predicting the End of a Bull Market Is So Difficult

Imagine an investor who decides to move a substantial portion of their portfolio into cash because they believe the bull market has lasted too long.

They may be correct that another bear market will eventually occur.

But that doesn't mean they'll be correct about when it happens.

The market could continue rising for another year or longer before experiencing a meaningful decline.

And even if a downturn eventually occurs, the market's low point could remain above the level at which the investor originally sold.

This creates a difficult challenge.

The investor must correctly decide when to exit the market and when to return.

Getting both decisions right consistently is extremely difficult.

For long-term investors, a more practical approach may be to periodically review portfolio allocations, rebalance when appropriate, and ensure that the level of investment risk remains consistent with their financial goals.

This doesn't mean ignoring warning signs or remaining invested in unsuitable positions.

It means recognizing that risk management and market timing are not the same thing.

A well-constructed investment strategy can account for changing market conditions without requiring an investor to predict the exact beginning or end of every market cycle.

What This Means for Your Investment Strategy

As we approach the end of 2026, investors have legitimate reasons to monitor economic growth, corporate earnings, inflation, valuations, and credit conditions.

These factors may provide important clues about the health of the economy and the sustainability of the current bull market.

But a bull market's age, by itself, isn't a reason to abandon a long-term investment strategy.

Rather than asking how much longer stocks can continue rising, investors may be better served by asking whether their portfolios are appropriately diversified, whether their investments remain aligned with their objectives, and whether they have a plan for navigating the next downturn whenever it arrives.

The lesson: Bull markets don't end simply because they've lasted several years. Economic fundamentals, corporate earnings, valuations, and financial conditions matter far more than the age of the market itself.

Myth #3: Cash Is the Safest Place to Be When Markets Are Uncertain

When the stock market becomes volatile, one of the most common reactions is to move money into cash.

After all, cash doesn't experience the daily price fluctuations associated with stocks, and investors can generally see exactly how much money they have available.

With uncertainty surrounding the midterm elections, inflation, interest rates, and the sustainability of the current bull market, holding cash may feel particularly attractive.

And there are certainly good reasons to maintain cash reserves.

But there's an important distinction between protecting your money from short-term market volatility and protecting your wealth over the long term.

Cash can help accomplish the first objective.

It may not always accomplish the second.

The Hidden Risk of Holding Too Much Cash

One of the biggest risks associated with holding cash for extended periods is inflation.

Inflation gradually reduces the purchasing power of money, meaning the same amount of money buys fewer goods and services over time.

For example, imagine an investor who holds $100,000 in a checking or savings account earning no interest.

If inflation averages 3% annually over the next 20 years, that $100,000 would have purchasing power equivalent to approximately $55,400 in today's dollars.

The account balance hasn't declined.

But the amount of goods and services that money can purchase has fallen considerably.

Even when cash earns interest, the important consideration is whether that return keeps pace with inflation after accounting for applicable taxes.

This is why an investment can appear safe on an account statement while still exposing the investor to a meaningful long-term financial risk.

What Is the Opportunity Cost of Staying in Cash?

Inflation isn't the only consideration.

Investors who remain in cash for extended periods may also miss opportunities for investment growth.

Consider a hypothetical investor with $100,000 who is deciding whether to remain in cash or invest for the next 20 years.

Let's compare three hypothetical average annual returns:

These examples assume annual compounding, no additional contributions or withdrawals, and exclude taxes and fees. They are hypothetical illustrations, not forecasts or guarantees of future investment performance.

The difference between earning 2% and 8% annually over 20 years is approximately $317,500.

That's a meaningful difference in potential retirement savings, financial flexibility, or wealth available to future generations.

Of course, earning a higher return generally requires accepting additional investment risk, and stock market returns will fluctuate from year to year.

But the example demonstrates why long-term investors should consider more than simply avoiding market declines.

The opportunity cost of avoiding investment risk can become a financial risk of its own.

Cash Still Has an Important Role in Financial Planning

None of this means investors should avoid holding cash.

In fact, I believe maintaining appropriate cash reserves is an essential part of a well-constructed financial plan.

The key is understanding what that money is intended to accomplish.

For example, cash or other highly liquid, relatively stable investments may be appropriate for:

• Emergency reserves: Money available for unexpected expenses, job loss, or financial emergencies.

• Short-term purchases: Funds intended for a vehicle, home down payment, or another expense within the next few years.

• Retirement income needs: Money set aside to help cover upcoming withdrawals without being forced to sell stocks during an unfavorable market environment.

• Known financial obligations: Funds reserved for taxes, tuition, or other anticipated expenses.

These are all legitimate reasons to hold cash.

However, money intended for retirement 20 years from now may have a very different investment objective than money needed to purchase a home next year.

Treating those two pools of money the same way could create unnecessary financial challenges.

Why Your Time Horizon Matters

One of the most important considerations when deciding how much cash to hold is your investment time horizon.

If you need money within the next year or two, protecting principal and maintaining liquidity may be more important than pursuing higher returns.

But if you're investing for retirement 15 or 20 years from now, short-term market volatility may be less important than your portfolio's ability to generate long-term growth.

This is also why I believe retirement income planning should distinguish between money needed in the near future and money intended to remain invested for many years.

For example, a bucket-based retirement income strategy might separate assets into different categories:

• Short-term bucket: Cash and relatively stable investments intended to support near-term withdrawals.

• Intermediate-term bucket: Investments designed to balance income, stability, and some growth potential.

• Long-term bucket: Growth-oriented investments intended to help address inflation, longevity, and future income needs.

This approach doesn't eliminate market risk or guarantee that withdrawals can always be funded without selling investments at a loss.

But it can provide a framework for managing liquidity while allowing longer-term assets to remain invested according to their objectives.

And importantly, it helps distinguish between holding cash for a specific financial purpose and holding cash because you're worried about what the stock market might do next.

What This Means for Your Investment Strategy

As we approach the midterm elections, some investors may be tempted to increase their cash holdings simply because they expect greater market volatility.

But before making that decision, it's worth asking a few questions.

What is this money intended for?

When will I need it?

Am I holding cash because it supports my financial plan, or because I'm trying to predict a market decline?

And if I move investments into cash, what circumstances would cause me to reinvest?

That last question is especially important.

Investors who move to cash during uncertain periods often discover that there is always another reason to remain cautious.

An election is followed by concerns about economic policy.

Those concerns are followed by questions about inflation, interest rates, or corporate earnings.

And before long, years may pass while the investor waits for an ideal opportunity to return to the market.

Cash can be an effective tool for managing short-term financial needs.

But it shouldn't automatically become the default investment strategy whenever uncertainty increases.

The lesson: Cash can protect your savings from short-term market volatility, but holding too much for too long can expose your wealth to inflation and missed growth opportunities. The safest strategy is often one that matches your investments to when you'll actually need the money.

Myth #4: It's Better to Wait Until After the Election to Invest

With the 2026 midterm elections approaching, some investors may be considering a simple strategy:

Wait until the election is over, see how the stock market responds, and then decide whether to invest.

At first glance, this sounds reasonable.

Why take additional investment risk when an important political event is just around the corner?

Wouldn't it make more sense to wait until the uncertainty passes?

The challenge is that waiting for greater certainty doesn't necessarily lead to better investment results.

In fact, some of the stock market's strongest periods have occurred when investors were facing significant uncertainty about the future.

The Stock Market Doesn't Wait for Certainty

One of the most important concepts for investors to understand is that stock prices are forward-looking.

The market doesn't simply respond to what is happening in the economy today.

It also reflects investors' expectations about what may happen in the months and years ahead.

This means stocks can begin rising before economic conditions improve, just as they can decline before an economic slowdown becomes apparent.

Consider what happens during an election.

Investors spend months anticipating potential outcomes, evaluating proposed policies, and adjusting their expectations.

By the time election results are announced, some of those expectations may already be reflected in stock prices.

And even when the results surprise investors, the market's reaction may not be what many people expected.

A political outcome that initially creates concern could be followed by rising stock prices.

Likewise, an outcome viewed favorably by investors doesn't guarantee positive returns.

That's because elections are only one of many factors influencing the market.

Corporate earnings, inflation, interest rates, consumer spending, and economic growth continue to matter regardless of which party wins.

The Cost of Missing the Market's Best Days

One of the biggest challenges with attempting to time the market is that some of its strongest days can occur during periods of heightened volatility.

Investors who move into cash to avoid potential declines may also miss significant market recoveries.

To illustrate why this matters, consider a hypothetical investment of $100,000 over 20 years.

If that investment earns an average annual return of 8%, it would grow to approximately $466,000, assuming annual compounding and no additional contributions or withdrawals.

Now imagine that an investor repeatedly moves into cash during uncertain periods and, as a result, earns an average annual return of only 5%.

That same $100,000 would grow to approximately $265,000.

That's a difference of more than $200,000.

These figures are hypothetical illustrations rather than actual market-timing results. They assume constant annual returns and exclude taxes, fees, and transaction costs. Actual market returns fluctuate, and no investment return is guaranteed.

The purpose isn't to suggest that every investor should expect to earn 8%.

It's to demonstrate how even a relatively small difference in long-term investment returns can significantly affect wealth accumulation.

In this example, a difference of just three percentage points in annual returns results in approximately 76% more wealth after 20 years, despite both investors starting with the same $100,000.

And repeatedly moving in and out of investments can introduce additional challenges, including transaction costs, taxes, and the possibility of missing important periods of market growth.

Market Timing Requires Two Correct Decisions

Imagine an investor who believes the stock market will decline following the midterm elections.

They decide to sell their stock investments and move into cash.

For that strategy to work successfully, they must make two important decisions.

First, they need to determine when to sell.

Second, they need to determine when to reinvest.

And the second decision may be even more difficult than the first.

What happens if the stock market rises immediately following the election?

Does the investor buy back in at higher prices?

What if stocks initially decline but then recover before economic conditions improve?

Or what if the market continues rising for several months before eventually experiencing a correction?

Even investors who correctly anticipate a market decline can struggle to benefit if they don't reinvest at an appropriate time.

This is why market timing can be so challenging.

Being correct about the direction of the market isn't necessarily enough. You also need to be correct about the timing.

Does That Mean You Should Invest Everything Immediately?

Not necessarily.

There's an important difference between trying to predict short-term market movements and developing a thoughtful investment strategy.

For example, an investor who has accumulated a substantial amount of cash may feel uncomfortable investing the entire amount at once.

Depending on their circumstances, investing gradually over a predetermined period may be a reasonable approach.

This is commonly referred to as dollar-cost averaging.

Instead of investing $120,000 all at once, an investor might choose to invest $10,000 per month over 12 months.

This approach can reduce the emotional pressure associated with selecting a single investment date.

It may also help an investor maintain discipline when markets become volatile.

However, dollar-cost averaging doesn't guarantee better returns or protect against investment losses. Because some money remains uninvested during the process, investing gradually may underperform investing immediately when markets rise.

The important distinction is that the investor has established a plan rather than waiting indefinitely for a more favorable market environment.

What This Means for Your Investment Strategy

As we approach the midterm elections, it's understandable that investors may want to wait until the political landscape becomes clearer.

But consider how often uncertainty appears throughout a typical investment cycle.

There's always another election.

Another Federal Reserve meeting.

Another inflation report.

Another geopolitical concern.

Another prediction about the next recession.

If investors wait until every major concern has been resolved, they may spend a considerable amount of time on the sidelines.

For long-term investors, a more productive approach may be to establish an investment allocation based on their financial goals, risk tolerance, and time horizon.

That doesn't mean ignoring market conditions or never making portfolio adjustments.

It means making those decisions within a disciplined investment process rather than reacting to individual headlines.

And for investors who are uncomfortable committing a large amount of money immediately, a predetermined investment schedule may provide a practical alternative to waiting for the perfect opportunity.

The lesson: Waiting until after an election may feel like a way to reduce investment risk, but market timing introduces risks of its own. A disciplined investment plan can be more valuable than trying to identify the perfect moment to invest.

Myth #5: Owning More Investments Automatically Means Better Diversification

One of the most common misconceptions about investing is that owning more investments automatically creates a better-diversified portfolio.

An investor might own 10 different mutual funds, several ETFs, and a handful of individual stocks and assume they're well diversified.

After all, the money is spread across numerous investments.

But what if many of those investments own the same companies?

What if several mutual funds follow nearly identical investment strategies?

Or what if the majority of the portfolio is concentrated in a relatively small group of large technology companies?

The number of investments you own doesn't necessarily determine how diversified your portfolio really is.

Diversification Is About What You Own, Not How Many Investments You Have

Consider an investor who owns five different large-cap growth mutual funds.

Each fund may have a different name, investment company, and portfolio manager.

But when you examine the underlying holdings, you might discover that all five funds have substantial exposure to many of the same companies.

In that situation, the investor may have five separate investments without achieving much additional diversification.

This is commonly referred to as portfolio overlap.

Overlap isn't necessarily bad.

In fact, owning the same company through multiple investment strategies can be perfectly reasonable when different portfolio managers have independently identified it as an attractive investment.

However, investors should understand how much exposure they have to individual companies, industries, and investment styles.

Otherwise, they may unknowingly take on more concentrated risk than they intended.

Why Manager Diversification Matters

One aspect of portfolio construction that I believe deserves more attention is manager diversification.

Different investment managers often have different philosophies about identifying attractive investments.

Some emphasize companies with strong earnings growth.

Others focus on businesses trading at attractive valuations.

Some concentrate on high-quality companies with durable competitive advantages.

Others use quantitative research or combine several investment approaches.

Even managers operating within the same investment category may construct portfolios differently.

For example, imagine an investor allocating $300,000 among three large-cap stock strategies.

Rather than selecting three funds that closely resemble one another, the investor might consider:

• $100,000 in a large-cap growth strategy: Emphasizing companies with strong growth potential.

• $100,000 in a large-cap core strategy: Investing across a broader range of established companies.

• $100,000 in a large-cap value strategy: Focusing on companies considered attractively priced relative to their fundamentals.

These strategies may still own some of the same companies.

But their different investment approaches can provide a more intentional balance between growth, valuation, and overall portfolio construction.

Of course, combining growth, core, and value strategies doesn't guarantee diversification or protect against market losses. Actual diversification depends on the underlying holdings and how the investments behave under different market conditions.

The objective isn't to eliminate every overlapping position.

It's to ensure that each investment serves a purpose within the overall portfolio.

Combining Active and Passive Investment Strategies

Another misconception is that investors must choose between active and passive investing.

Passive investment strategies generally seek to track a particular market index.

Active investment strategies attempt to achieve specific investment objectives through security selection, portfolio construction, and ongoing management.

Both approaches have advantages and limitations.

Passive investments can provide broad market exposure, often with relatively low expenses.

However, capitalization-weighted indexes may become increasingly concentrated in their largest companies as those companies grow in market value.

Active strategies may offer opportunities to manage concentration, emphasize different investment characteristics, or pursue returns that differ from an index.

But active management also introduces manager-selection risk, and active funds may underperform their benchmarks, sometimes over extended periods.

Rather than viewing active and passive investing as competing philosophies, I believe they can complement one another.

For example, an investor might use a passive ETF for broad market exposure while incorporating actively managed strategies that emphasize different investment styles or areas of the market.

The goal is to construct a portfolio in which the individual investments work together rather than simply accumulating additional funds.

Don't Forget About International and Small-Cap Investments

Diversification also extends beyond investment managers and styles.

An investor who owns several large-cap U.S. stock funds may still have relatively limited exposure to smaller companies or international markets.

This can become particularly important when a small group of large companies accounts for a significant portion of major market indexes.

International investments provide exposure to companies operating in different economies, industries, and currencies.

Small-cap investments provide exposure to smaller businesses that may have different growth opportunities and risks than larger companies.

Neither category is guaranteed to outperform U.S. large-cap stocks.

International investing introduces additional considerations, including currency fluctuations and geopolitical risks. Smaller companies can also experience greater volatility and liquidity challenges.

But incorporating different market segments may help reduce dependence on a single investment category.

What This Means for Your Investment Strategy

As we approach the midterm elections, investors may be tempted to add more investments to their portfolios in an effort to reduce uncertainty.

But adding another mutual fund or ETF doesn't automatically make a portfolio safer.

Before adding an investment, I believe it's worth asking several questions.

What does this investment own?

How much does it overlap with my existing holdings?

Does it provide exposure to a different investment style, market segment, or manager?

And most importantly, what purpose does it serve within my overall investment strategy?

A portfolio with 20 investments isn't necessarily better diversified than one with 10.

In some cases, a smaller number of carefully selected investments may provide a more intentional allocation, reduce unnecessary overlap, and make the portfolio easier to monitor.

The objective should be to create a portfolio that balances growth opportunities, risk management, and long-term financial goals.

The lesson: True diversification isn't about owning the greatest number of investments. It's about understanding what you own, managing concentration and overlap, and combining complementary investment strategies that work together toward your long-term financial goals.

Myth #6: Bonds Are Risk-Free When Stocks Become Volatile

When investors become concerned about the stock market, bonds are often viewed as a safer alternative.

And for good reason.

Bonds can provide income, help reduce overall portfolio volatility, and offer diversification from stocks.

But there's an important misconception that investors should understand.

Bonds are generally considered less volatile than stocks, but that doesn't mean they're risk-free.

In fact, recent years have reminded investors that bonds can experience meaningful declines, particularly when inflation and interest rates change.

Understanding How Bonds Work

When you purchase a bond, you're essentially lending money to a government, municipality, or corporation.

In exchange, the issuer generally agrees to make interest payments and repay the bond's principal at maturity, subject to its ability to meet those obligations.

For example, imagine purchasing a $100,000 bond with a 4% annual coupon rate and a 10-year maturity.

Assuming the issuer makes all required payments, you would receive $4,000 annually in interest and your $100,000 principal back when the bond matures.

That may sound straightforward.

But what happens if interest rates rise after you purchase the bond?

Newly issued bonds may offer higher yields, making your existing bond less attractive to investors.

As a result, the market value of your bond may decline.

This is one of the most important concepts for bond investors to understand.

Bond prices and market interest rates generally move in opposite directions.

Why Bonds Can Lose Value When Interest Rates Rise

Consider an investor who purchases a bond yielding 3%.

A year later, comparable newly issued bonds are offering yields of 5%.

An investor purchasing bonds today would likely prefer the newer bond paying a higher yield, assuming similar credit quality and other characteristics.

To compete, the existing bond's market price would generally need to decline.

This doesn't necessarily mean the original bondholder will lose money if they hold the bond until maturity.

If the issuer meets its obligations, an individual bond purchased at par can still return its face value at maturity, even if its market price fluctuates along the way.

However, selling the bond before maturity could result in a loss.

And for investors holding bond mutual funds or ETFs, changing interest rates can affect the market value of the underlying investments.

Unlike an individual bond, a traditional bond fund generally doesn't have a single maturity date when the investor is guaranteed to receive their original principal back.

This distinction becomes especially important when investors expect to use their bond investments for near-term retirement income.

What 2022 Taught Bond Investors

One of the clearest examples of interest-rate risk occurred in 2022.

As inflation accelerated, the Federal Reserve began aggressively raising interest rates.

Stock prices declined, but bonds also experienced substantial losses.

The Bloomberg U.S. Aggregate Bond Index, a widely followed benchmark for investment-grade U.S. bonds, declined approximately 13% in 2022.

That was an unusually difficult year for traditional bond investors.

Many investors who expected their bonds to provide stability during a stock market downturn were surprised to see both portions of their portfolios decline.

This doesn't mean bonds failed as an investment category or should be avoided.

It demonstrates why understanding the risks within a bond portfolio is just as important as understanding the risks associated with stocks.

Not All Bonds Carry the Same Risks

Just as different stocks have different investment characteristics, bonds can vary significantly.

Some of the important considerations include:

• Interest-rate risk: Bonds with longer maturities or greater duration are generally more sensitive to changes in interest rates.

• Credit risk: Corporate and municipal bond issuers may experience financial difficulties that affect their ability to make payments.

• Inflation risk: Fixed interest payments may lose purchasing power when inflation remains elevated.

• Liquidity risk: Certain bonds may be difficult to sell quickly at an attractive price.

• Reinvestment risk: When bonds mature or interest payments are received, investors may have to reinvest at lower prevailing interest rates.

For example, short-term U.S. Treasury securities generally have less interest-rate sensitivity than long-term bonds.

High-yield corporate bonds may offer greater income potential but also carry higher default risk and can experience significant declines during economic downturns.

Municipal bonds may offer tax advantages for certain investors, but their credit quality, liquidity, and interest-rate sensitivity still deserve consideration.

This is why simply increasing your allocation to bonds doesn't automatically make your portfolio safer.

The types of bonds you own matter.

Why Bonds Still Play an Important Role in Retirement Planning

Despite these risks, I believe bonds remain an important component of many investment portfolios, particularly for investors approaching or living in retirement.

The key is understanding what role they're intended to serve.

For example, bonds may help provide:

• Income: Interest payments that can contribute to retirement cash flow.

• Diversification: Exposure to investments that may behave differently from stocks under certain market conditions.

• Portfolio stability: High-quality, shorter-duration bonds may experience less volatility than stocks, although losses remain possible.

• Liquidity planning: Bonds with appropriate maturities can help fund anticipated future expenses.

• Rebalancing opportunities: Fixed-income investments may provide resources for adjusting portfolio allocations when market conditions change.

This also connects to the bucket-based retirement income strategies we've discussed in previous articles.

Rather than treating all bonds as interchangeable, investors can consider matching different types of fixed-income investments to specific financial objectives.

For example, shorter-term investments may be appropriate for money needed in the next few years, while intermediate-term bonds may help provide income and diversification.

Longer-term investments may serve different purposes but generally introduce greater sensitivity to interest-rate changes.

The objective isn't necessarily to eliminate risk.

It's to understand which risks you're taking and whether those risks are appropriate for the money you've invested.

What This Means for Your Investment Strategy

As we approach the midterm elections, investors may become more cautious about stocks and consider increasing their bond allocations.

That may be appropriate for some investors, particularly if their financial circumstances, time horizons, or risk tolerance have changed.

But moving money from stocks into bonds shouldn't automatically be viewed as eliminating investment risk.

Instead, investors should consider how different investments may respond to changes in inflation, interest rates, economic growth, and credit conditions.

For example, an economic slowdown accompanied by falling interest rates may create a very different environment for bonds than a period of persistent inflation and rising rates.

Understanding those differences can help investors make more informed allocation decisions.

And for retirees, coordinating bond investments with cash reserves, income needs, and long-term growth investments may be especially important.

The lesson: Bonds can provide income, diversification, and stability, but they aren't risk-free. A well-constructed portfolio should consider interest-rate risk, credit quality, maturity, and the role each investment plays in supporting your long-term financial plan.

Myth #7: Successful Investors Must Predict What Happens Next

One of the biggest misconceptions about investing is that successful investors must consistently predict what will happen next.

Will the Federal Reserve lower interest rates?

Will inflation continue to moderate?

Will the midterm elections lead to a change in government policy?

Will the current bull market continue, or are we approaching the next bear market?

These are all important questions, and understanding the economic environment can help investors make informed decisions.

But there's a difference between evaluating economic conditions and believing you must accurately predict the future to achieve long-term investment success.

Successful investing isn't necessarily about knowing what happens next. It's about building a strategy that can help you navigate different outcomes.

Even Professional Investors Can't Consistently Predict the Future

Financial markets are influenced by an enormous number of variables.

Corporate earnings, interest rates, inflation, consumer spending, government policy, geopolitical events, and investor sentiment all play important roles.

And those variables are constantly changing.

Even experienced economists, investment managers, and market strategists regularly disagree about what the future holds.

Consider how difficult it can be to predict the Federal Reserve's next move.

An investor might correctly anticipate that interest rates will decline but incorrectly predict how the stock market will respond.

Why?

Because the reason interest rates are declining matters.

If rates fall because inflation is moderating while economic growth remains healthy, investors may view that favorably.

But if rates fall because the economy is entering a recession, the market's response could be very different.

The same principle applies to elections, corporate earnings, and economic data.

Predicting an event correctly doesn't necessarily mean you'll predict the market's reaction correctly.

A Financial Plan Should Prepare for Multiple Outcomes

Rather than building an investment strategy around one economic forecast, I believe investors should consider how their portfolios might perform under several different scenarios.

For example, what happens if:

• The economy continues expanding and corporate earnings grow?

• Inflation remains elevated longer than expected?

• Interest rates decline significantly?

• The economy experiences a recession?

• Stocks experience a substantial correction or bear market?

A thoughtfully constructed portfolio should consider these possibilities.

That doesn't mean every investment will perform well in every environment.

And diversification doesn't guarantee against losses.

But combining different asset classes, investment styles, and management approaches may help reduce dependence on a single economic outcome.

For example, growth-oriented investments may provide opportunities to participate in economic expansion and corporate earnings growth.

Value-oriented strategies may offer exposure to companies with different valuations and business characteristics.

International and small-cap investments can provide exposure to different markets and segments of the economy.

Meanwhile, appropriate cash reserves and fixed-income investments may help address liquidity needs and provide some portfolio stability.

The objective isn't to own every possible investment.

It's to construct a portfolio where each holding serves a purpose.

The Importance of Staying Invested

One of the most powerful advantages investors have is time.

And time becomes particularly valuable when combined with the potential benefits of compounding.

Consider an investor who starts with $100,000 and earns a hypothetical average annual return of 8%.

Without making any additional contributions, that investment could grow to approximately:

These examples assume annual compounding, no additional contributions or withdrawals, and exclude taxes and fees. The 8% return is hypothetical, not a forecast or guarantee. Actual investment returns fluctuate and may include significant losses.

What's particularly interesting is how much of the potential growth occurs later in the investment period.

During the first 10 years, the portfolio grows by approximately $116,000.

During the next 10 years, it grows by approximately $250,000.

And during the final 10 years, it grows by approximately $540,000.

This demonstrates why maintaining a long-term investment strategy can be so valuable.

Of course, real investment returns don't arrive in a consistent 8% pattern every year.

Some years will produce strong gains.

Others may result in substantial losses.

But repeatedly abandoning an investment strategy because of short-term uncertainty can interrupt the long-term compounding process.

Time in the market doesn't eliminate investment risk, but consistently attempting to time the market can introduce additional risks that investors may not fully appreciate.

Good Investment Management Isn't the Same as Market Timing

It's also important to recognize that staying invested doesn't mean ignoring economic conditions or never making investment changes.

I believe thoughtful investment management should be an ongoing process.

That may include evaluating valuations, monitoring corporate earnings, reviewing portfolio concentration, assessing investment managers, and adjusting allocations when appropriate.

For example, if a portfolio becomes heavily concentrated in a handful of companies following several years of strong performance, rebalancing may help manage that exposure.

If an investor is approaching retirement, adjusting the allocation between growth investments and income-producing assets may help address changing financial needs.

Or if an investment manager's philosophy, performance, or portfolio construction changes significantly, it may be appropriate to reconsider that investment.

These are examples of investment management decisions made within a broader financial strategy.

They're different from selling investments simply because an election is approaching or someone predicts a recession.

The distinction is important.

A disciplined investment process can adapt to changing circumstances without requiring investors to correctly predict every market movement.

What This Means for Your Investment Strategy

As we approach the 2026 midterm elections, investors will continue hearing predictions about political outcomes, interest rates, economic growth, and the direction of the stock market.

Some forecasts will prove accurate.

Many won't.

But your long-term financial success shouldn't depend entirely on which predictions turn out to be correct.

Instead, consider focusing on the factors you can control.

How much you're saving and investing.

Whether your portfolio is appropriately diversified.

How much investment risk you're taking.

Whether your investments align with your financial goals and time horizon.

And whether you have a strategy for managing market volatility without making emotional decisions.

For investors approaching retirement, this also means having a plan for generating income and managing withdrawals through different market environments.

For younger investors, it may mean consistently investing through market cycles and allowing time and compounding to work toward long-term goals.

And for families building generational wealth, it may mean developing an investment strategy that balances current financial needs with opportunities for future generations.

Ultimately, successful investing requires patience, discipline, and a willingness to accept that uncertainty will always be part of financial markets.

The lesson: You don't need to predict the next election result, interest-rate decision, or bear market to become a successful long-term investor. You need a thoughtful financial plan, a disciplined investment strategy, and the ability to stay focused on your goals when the headlines become uncertain.

Final Thoughts: Invest for Your Future, Not the Next Election

As we approach the 2026 midterm elections, investors will undoubtedly encounter plenty of predictions about what comes next.

Will divided government benefit the stock market?

Can the current bull market continue?

Will inflation and interest rates create additional challenges for the economy?

These are reasonable questions, and understanding the economic environment is an important part of investment management.

But as we've explored throughout this Planning Playbook, some of the most costly investment mistakes occur when investors allow short-term uncertainty to interfere with long-term financial decisions.

The research from Capital Group reminds us that elections haven't historically been a reliable reason to abandon an investment strategy.

Meanwhile, Invesco's analysis reinforces the importance of evaluating economic fundamentals, corporate earnings, and credit conditions rather than assuming a bull market must end simply because it has lasted several years.

Neither perspective guarantees what happens next.

And that's precisely the point.

Focus on What You Can Control

You can't control election results, Federal Reserve decisions, inflation, or the direction of the stock market.

But you can control many of the decisions that influence your long-term financial success.

You can maintain an appropriate investment allocation, diversify across complementary investment strategies, monitor portfolio concentration, and make thoughtful adjustments as your financial circumstances change.

You can also develop a strategy for managing cash reserves, generating retirement income, and navigating periods of market volatility.

And perhaps most importantly, you can avoid making emotional investment decisions based on predictions that may never materialize.

That doesn't mean ignoring investment risks.

It means addressing those risks through a disciplined financial planning process rather than attempting to predict every market movement.

Why Having a Financial Plan Matters

A well-constructed financial plan should help answer questions that are far more important than who wins the next election.

Are you saving enough for retirement?

Is your investment portfolio appropriately diversified?

Do you have sufficient liquidity for upcoming expenses?

How will you generate income throughout retirement?

Are your investments aligned with your long-term financial goals?

And are you making decisions that support the financial legacy you hope to leave your family?

These questions deserve attention regardless of whether the stock market is reaching new highs or experiencing a significant downturn.

A financial advisor can help evaluate these considerations, identify potential gaps, and develop an investment strategy designed around your specific circumstances.

Because ultimately, the purpose of investing isn't simply to outperform the market or correctly predict the next economic event.

It's to help you accomplish the financial goals that matter most to you.

The greatest advantage an investor can have isn't the ability to predict the future. It's having a financial plan and investment strategy designed to help navigate an uncertain future.

Continue Your Wealth Planning Journey

Successful investing requires more than choosing investments. It involves understanding risk, building a diversified portfolio, and developing a strategy that supports your financial goals through different market environments.

If you'd like to learn more, I encourage you to explore my free educational resources:

• Guide to ETF Investing: Learn how exchange-traded funds work, the differences between active and passive strategies, and how ETFs can fit into a diversified investment portfolio.

• Guide to Mutual Fund Investing: Explore different investment styles, the importance of manager diversification, and what to consider when evaluating mutual funds.

• Guide to Retirement Income Investing: Discover strategies for turning retirement savings into income while balancing liquidity, long-term growth, and the financial legacy you hope to leave behind.

Simply click the Free Wealth Guides link at the top of the page to access these resources and continue building a financial strategy designed around your future.