One of my cardinal rules of investing is that politics and money management don’t mix.

It’s not that I don’t have strong personal opinions on certain issues close to my heart just like everyone else. It’s just that I’ve seen far too many otherwise intelligent and level-headed people over the years make insanely shortsighted decisions based on politically-driven exuberance or despair that I’ve learned to separate those base instincts from my financial choices.

As passionate as you may feel today, trading based on elevated political emotions is a choice you’ll most likely live to regret.

That said, I’ve seen a lot of talk in the aftermath of the recent US presidential election about how it may impact the markets in the near future. And frankly, there are some really bad takes out there that may lead normal investors to some very poor ideas from betting heavily on major upswings to selling everything in fear. While I don’t do politics, I still feel the responsibility to offer a constructive perspective helping people navigate their feelings regardless of who they voted for.

To be clear, I have absolutely no idea how markets will react over the coming years and I don’t believe anyone else does either. But I do have a lot of historical data at my disposal and thus a unique opportunity to offer a nonpartisan perspective.

Forget the predictions. Would you like to know which portfolio options are least susceptible to post-election drama?

Stick with me, and you’ll learn how to turn off the cable news and invest with confidence no matter who is in charge.

Measuring Election Impact

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Economies are incredibly complicated with lots of moving parts, and honestly I think it’s silly to play the attribution game where every move has a clear single-issue cause and effect. So I’ll say right from the start that there’s far more to market performance than simple presidential politics, and we’ll even cover an example in a moment.

We have to start somewhere, though, and I approached the problem by isolating the change in inflation-adjusted returns in the year preceding and following every US presidential election since 1970. That’s 13 elections, not including the most recent one where we do not yet have enough data to see how it works out. That’s a pretty decent sample that should cover lots of different economic environments and political policy changes of all types without getting too deep into the weeds.

For one example, here’s how that data looks for the total US stock market.

This is how it works.

Richard Nixon defeated George McGovern in November of 1972. The real return for stocks in the US in 1972 was 11.6%. In 1973 it was -25.1%. So the change in returns across the presidential transition was -36.7%, which you can see in the first 1972 column on the left. Repeat that process for every election, and you get the full collection of changes shown above. The idea is to study how markets immediately reacted in the wake of every presidential election, regardless of the specific cause.

Next, picture taking the highest blue column and lowest red dip above and stacking them together. This shows the full range of extremes, both good and bad. Repeat that process for every portfolio on the site and sort them by the magnitude of the swings, and the chart looks like this.

You can already see some clear trends in portfolio consistency, but looking a little deeper I notice one more thing that gets my attention. Putting all politics aside, that 2008 high point in the first chart represents a hard market rebound in late 2009 from the great recession of 2008 that I think most people would agree involved a lot more than just a presidential election. If one excludes that one year that acts as the high point for so many portfolios, the blue upside flattens out and shows off the generally balanced volatility involved.

Notice that the four portfolios on the left did not change, but two more surfaced as notably consistent portfolio options with minimum downside. So let’s study these top-6 asset allocations in steady election year consistency to see what they have in common.

Reliable Portfolios for All Outcomes

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All six of the most consistent election-year portfolios are in the same general ballpark in terms of the spread of good and bad years. Rather than covering the details of the exact asset percentages of each one, here are visual representations that can help us study the allocations at a glance. For reference, red is stocks, green is bonds, and blue is real assets like gold, commodities, and real estate. Also, solid dark colors represent domestic assets while patterned light colors are international.

On the surface, it’s difficult to identify any major patterns.

The percentage of bonds is all over the map, so simple explanations around buying more bonds to minimize stock risk do not hold up. Just half of the portfolios hold international stocks, so it can’t be attributed to normal ideas about diversifying stocks outside of the US. Similarly, only half of the portfolios contain small or value stocks, so factor-based reasoning does not apply. Perhaps the one trend is more real assets than usual, but the single best portfolio contained no real assets at all!

So is it just random chance?

I would argue not at all.

It may not be immediately obvious until you understand the underlying mechanisms for how these portfolios work, but there’s one very interesting commonality they all share. These 6 portfolios are good examples of three distinct approaches to a concept called risk parity.

The 3 Types of Risk Parity

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The idea of risk parity has been around for a while, and the name comes from the idea that by balancing the risk of each asset in a portfolio, one can create an asset allocation that is equally capable of success in many different situations. But I’ve found that learning about risk parity is trickier than it should be because the people who discuss these things often have different definitions of risk.

To make it easier, I think it’s more helpful to think in terms of impact. When individual portfolio components react to everyday market movements, what is their impact on the portfolio? And how can one select assets to have equal impact in different situations?

Open up the discussion space, and I see at least three distinct approaches to risk parity.

Volatility Parity

The classic definition of risk parity revolves around the mathematical concept of balancing the volatility of each asset in a portfolio. For much more detail than I have time to offer here, one of the best explanations you’ll find is from Larry Swedroe in his book Reducing the Risk of Black Swans. But here’s a simple example of how it works.

Stocks are more volatile than most bonds. So to balance the impact of their inherent volatility on the portfolio, one can purchase small percentages of stocks and large percentages of bonds. That way, no matter if stocks have a bad day or bonds take a haircut, the effect on the portfolio account balance is the same.

You can clearly see that desire to tweak percentages to balance risk in two particular portfolios on our top-6 list — Swedroe’s Larry Portfolio and Dalio’s All Seasons Portfolio.

These two portfolios contain the highest percentages of bonds of the portfolios I track precisely because they seek to balance the impact of those bonds with small percentages of highly volatile assets like international small caps, emerging markets, gold, and commodities. In fact, if you read Dalio’s work you’ll see that he sometimes takes it one step further to do counterintuitive things like leveraging cash to amp up its volatility to match. For volatility parity portfolios, standard deviation is an important measuring point which is why the percentages are precisely controlled.

Economic Parity

If volatility parity is the mathematician’s micro-level approach to balancing asset impact by tightly adjusting each dial, economists tend to think much bigger. They see risk not as volatility on a spreadsheet but as real-world times of high inflation or economic stagnation.

I think this mindset is best exemplified by Harry Browne’s Permanent Portfolio, and my own Golden Butterfly is also heavily influenced by his ideas.

Speaking of presidential elections, Browne was a former Libertarian candidate for president and a big proponent of Austrian economics. He believed that by selecting specific assets that perform well in known economic environments like inflation, deflation, prosperity, and recession, one can build a portfolio that can survive and thrive no matter what set of conditions we happen to experience at any one time. This is also why the Permanent Portfolio eschews international stocks and bonds, as Browne perceived risk in terms of internal economic conditions that are better diversified using specialized assets to capture internal cashflows rather than external market alternatives.

The Golden Butterfly builds on the same four basic assets and adds small cap value to the mix to tilt the portfolio slightly towards prosperity, but the underlying concept is the same. Balance the impact of different economic conditions, and you set yourself up for success even in tough times.

Asset Parity

The third form of risk parity is honestly one where some professionals may disagree with my terminology or characterization. But the more I think about it, the more I see the same basic approach in another train of portfolio thought. So hear me out.

When I study concepts like the Meb Faber’s Ivy Portfolio and Craig Israelsen’s 7Twelve Portfolio, they clearly don’t follow classic philosophies like finding the “right” percentage of stocks and bonds based on your age. They also don’t get into mathematical volatility balancing games nor do they necessarily fixate on balancing economic conditions within a country. Instead, from my perspective they take a rather pragmatic approach to risk management by diversifying their asset baskets equally among many very different things.

Both prioritize international diversification to avoid concentration in any one country. They each hold the same overall percentage of stocks and healthy portions of commodities and real estate. The 7Twelve Portfolio does contain one small cap fund, but neither would be considered factor-based portfolios as they stick to tangible asset classes. And they even intentionally hold all of the very different things in roughly equal proportions* rather than over-thinking specific percentages. That’s actually where the 7Twelve Portfolio gets its name, as it seeks to hold 12 different assets of 7 different types.

So while it doesn’t get the same attention as volatility parity or even economic parity, I would argue that this focus on spreading one’s money evenly across many different asset types represents its own distinct approach to risk parity — asset parity. Buy enough different types of groceries in the basket, and even if one spoils you’ll still have a nice meal.

(*) Note that many of the different asset slice sizes in the 7Twelve portfolio image are an artifact of my own asset simplifications for modeling purposes. Look at Israelsen’s recommendations and they’re essentially equal weight.

The Benefits of Balance

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Regardless of their differences, the three types of risk parity still share much in common.

First, all require specific types of very different assets to accomplish their goals because simply mixing up stock types doesn’t have the same effect. That’s why you’ll hear risk parity fans talk a lot about correlations, which is a measure of how closely assets move together. Personally I think some people get way too into the weeds with precise correlations to the point where they lose sight of the larger drivers like economic and asset diversity, but I do understand where it’s coming from. You need some assets to zig while others zag, as that’s how risk parity portfolios work.

Another thing they have in common is that investors who have a winners mindset (think stock pickers or hardcore value investors) rather than a parity mindset tend to really dislike these portfolios because they don’t operate in a manner they understand. Risk parity portfolios always contain something doing poorly by design, which drives some people crazy. But once you understand how measurable investing mechanisms like Shannon’s Demon are especially effective in uncorrelated risk parity portfolios, it starts to make a lot more sense. If you’re more inclined to think in terms of chemistry instead of studying atoms in isolation, then risk parity may be for you.

Also, it’s important to note that there’s plenty of overlap between concepts. For example, Dalio speaks just as much about economic diversification as he does about volatility balancing in his All Seasons Portfolio. Also, the Permanent Portfolio and 7Twelve Portfolio share a similar appreciation for equal-weight asset diversity. So the lesson here is not to choose one path at the exclusion of the others, but to understand all three approaches and how they can build on one another to balance risk.

Seek parity rather than extremes, and the road is a lot less bumpy.

Lessons for Changing Times

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It seems fitting that the concept of balance emerged as a solid solution for investing in a hyper-partisan political environment. It’s normal for smart people to have strong beliefs about certain things, but in some fields like finance that conviction can actually be our downfall. So no matter how you feel about the future right now, keep this lesson in mind:

Elections may matter to you for many important reasons, but how you invest your life savings does not need to be one of them.

If you balance your portfolio to react equally to any outcome, then big outside events will have relatively small effects on your investments. And for politically-minded readers, note that this is a great lesson especially if you’re a dedicated political activist! Pick a balanced portfolio that you don’t need to babysit, and it will free you to spend your time and energy on the high-impact things that you truly care about.

And make no mistake, this applies to way more than just politics. In case you’re wondering, if you open the same analysis where we started to every year instead of just election years, the chart looks like this.

The same four volatility and economic parity portfolios feature prominently, while the most concentrated Total Stock Market portfolio again comes up last. Our two asset parity portfolios fare worse with more data, which could have something to do with unique years for their high commodity allocations or perhaps simply indicates that mixing in volatility and economic parity concepts is a helpful tweak to increase dependability. And a few things like the Global Market Portfolio also come to the forefront offering an entirely different type of balance deserving of its own discussion.

So yes, I’ll be the first to say that limiting yourself to thinking in terms of election years doesn’t tell the whole story. But the interesting thing is that overall, the portfolio data is clearly no election-year fluke. Certain approaches really are more consistent than others, and if that’s important to you then it’s worth your time to learn how they work.

No matter whether you’re talking about politics or portfolios, I truly believe that if you’re looking for stability in your life then balance usually wins out. We all have different callings, and I can’t solve every problem in the world. But when it comes to learning about asset allocation I have your back.

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