To The Moon

Buying the World Before America Votes: Is VT a Smart Investment Ahead of the US Midterms?

Why investing in the world’s stock market may be a better bet than trying to predict the next occupant of the political hot seat.

There is something fascinating about investing on the eve of a major political event. Markets are nervous, commentators are making predictions, political divisions are dominating the headlines, and investors are wondering whether tomorrow’s result could make them richer or poorer.

With the US midterm elections approaching, one interesting question emerges: could buying shares in Vanguard’s Total World Stock ETF (VT) just before Americans head to the polls be a smart investment move?

And, more specifically, what happens if the Democrats win?

My answer is that there is a compelling investment case for VT, but perhaps not quite for the reason you might expect.

The real opportunity isn’t necessarily betting on a Democratic victory. It is buying into global capitalism, taking advantage of the possibility of a post-election market rally, and positioning yourself for long-term wealth creation.

The investment: Buying a piece of the world

VT, the Vanguard Total World Stock ETF, is one of the simplest ways to gain exposure to the global stock market through a single investment.

Rather than trying to identify the next Apple, Microsoft, Nvidia or Amazon, VT gives investors exposure to thousands of companies across developed and emerging economies.

It includes American giants, European industrial businesses, Japanese manufacturers, Asian technology companies and emerging-market opportunities.

In effect, you are buying a small piece of the world’s corporate economy.

The attraction is straightforward: instead of having to predict which country, sector or company will dominate the next decade, you let global markets determine the winners.

VT also has a particularly attractive cost structure, with an annual expense ratio of approximately 0.06%. That means the ongoing fund management cost is relatively insignificant compared with many actively managed investment products.

For investors who want broad diversification without constantly monitoring individual companies, it is a compelling proposition.

Why buy just before the US midterm elections?

Political events can create uncertainty, and uncertainty often produces volatility.

The US midterms are particularly interesting because they can change the balance of power in Washington without changing the presidency.

A change in congressional control can influence government spending, taxation, regulation, trade policy and the broader political environment.

Historically, US equities have often performed well following midterm elections.

Historical market research has highlighted a tendency for the S&P 500 to deliver positive returns in the months following midterm elections. This is sometimes attributed to the removal of political uncertainty, as investors can begin assessing the implications of the results rather than speculating about them.

It is important to recognise that historical performance does not guarantee future returns. Nor does it establish that one political party is inherently better for markets.

Nevertheless, the historical pattern makes the period around midterm elections worth examining.

The interesting question is whether the market could respond positively to a Democratic victory.

The Democratic victory scenario

Imagine the Democrats make substantial gains and take control of the House of Representatives while Republicans retain the Senate.

This would create a divided government.

Interestingly, that outcome could be viewed positively by financial markets.

Why?

Because political gridlock can sometimes be reassuring to investors.

A divided Congress can make sweeping legislative changes more difficult. It can also create additional checks and balances on executive power, potentially reducing uncertainty around major policy shifts.

For investors, predictability can be valuable.

Markets generally prefer an environment where businesses can make long-term decisions without constantly worrying about significant changes to taxation, regulation or government policy.

A Democratic victory in the House, without complete Democratic control of Congress, could therefore produce an interesting combination: political change without a wholesale change in economic policy.

It is not difficult to construct a scenario in which investors interpret that outcome as relatively market-friendly.

However, a Democratic sweep would be a different proposition. Increased regulatory scrutiny, changes to fiscal priorities and potential uncertainty for particular industries could produce a less enthusiastic response.

The details matter.

What are the chances VT rises after a Democratic win?

There is no reliable statistical model that can tell us precisely how VT will respond to a Democratic victory.

However, as a subjective investment assessment, I would put the probability of VT delivering a positive return over the month following a Democratic House victory at approximately 58%.

That compares with a 42% probability of a negative return.

This is a judgement-based estimate, not a statistically established probability derived from historical Democratic election outcomes.

Why lean positive?

Three considerations influence that assessment:

1. Historical post-midterm market performance has generally been encouraging.

2. A divided government could reduce concerns about major policy changes.

3. Investors may welcome the removal of election uncertainty and return their attention to corporate earnings and economic fundamentals.

But there is an important qualification.

The market does not simply react to whether Democrats win or Republicans win. It reacts to the difference between what investors expected and what actually happened.

If a Democratic victory has already been priced into share prices, the result could produce little movement.

The market could even fall despite the Democrats winning.

That is why I would regard the election as a potential catalyst rather than the foundation of the investment thesis.

Why VT is particularly interesting for long-term investors

This is where the argument becomes considerably stronger.

If the intention is to hold VT for five, ten or even twenty years, the election becomes far less important.

Think about the investment horizon.

Over the next decade, global businesses will continue developing new technologies, expanding into new markets, improving productivity, competing for customers and generating profits.

Some companies will fail. Others will become tomorrow’s market leaders.

Some countries will experience economic difficulties, while others will enjoy periods of exceptional growth.

VT provides exposure to that changing global landscape.

Its greatest advantage is that you do not need to know in advance which companies will succeed.

You participate in the broader performance of the global equity market.

This diversification is particularly attractive in a world where political, economic and technological power is constantly shifting.

The United States remains a major component of the fund, but investors are also exposed to Europe, Japan, the United Kingdom, emerging Asia and other markets.

It is a way of avoiding the assumption that America’s current economic dominance will remain unchanged forever.

The power of compounding

Perhaps the most persuasive reason to own VT is the potential power of long-term compounding.

Consider an illustrative investment of US$25,000.

Assuming an average annual return of 7%, with dividends reinvested, the investment could grow to approximately:

* Five years: US$35,064.

* Ten years: US$49,179.

* Fifteen years: US$68,975.

* Twenty years: US$96,742.

These figures are hypothetical and assume a constant annual compound return. Actual stock-market returns are unpredictable, and there will inevitably be periods of significant volatility.

Nevertheless, the illustration highlights something important.

The difference between a successful long-term investment and a disappointing one may have much more to do with time in the market than with identifying the perfect day to buy.

Investors who repeatedly wait for political events, economic announcements or market corrections can sometimes miss substantial periods of market growth.

The objective should be to own productive assets for long enough to benefit from their growth.

My preferred buying strategy

If I were investing in VT with a five-to-ten-year horizon, I would be reluctant to let the midterm elections determine my entire investment decision.

I would consider splitting the initial investment into three purchases:

* 60% before the election.

* 20% over the following two months.

* 20% over the subsequent three months.

This provides immediate exposure if markets rally following the election, while retaining some capital to invest if markets experience a pullback.

It is not a strategy guaranteed to outperform investing everything immediately. It is simply a way of balancing market exposure against the uncertainty of short-term timing.

For investors with a long investment horizon, regular contributions and reinvested dividends could be even more important than the initial entry point.

What could derail the investment?

No investment thesis is complete without considering the risks.

VT is diversified, but it is still an equity investment.

A global recession, persistent inflation, higher interest rates, disappointing corporate earnings or geopolitical instability could all cause significant declines.

There is also an important consideration for New Zealand investors.

VT is US-domiciled and trades in US dollars. New Zealand investors need to consider foreign investment fund (FIF) tax rules, currency movements and potential US estate-tax implications.

The tax treatment can materially affect the actual return received by a New Zealand-based investor.

It is worth obtaining appropriate tax advice before committing substantial capital.

The verdict: Buy the world, not the election result

My overall assessment of VT is positive.

I would give it an 8.5/10 for long-term investment attractiveness, reflecting its global diversification, low costs and straightforward exposure to worldwide equities.

As for the possibility of a post-election rally following a Democratic victory, I would assign a subjective 58% probability of VT being higher one month later.

That is a modest bullish edge, not a high-conviction prediction.

But here is the bigger point.

If you are investing for the next decade, why should the identity of the political party controlling Congress tomorrow determine whether you own a diversified portfolio of the world’s leading businesses?

Political fortunes change. Presidents come and go. Governments rise and fall.

Businesses continue innovating, competing and creating economic value.

The strongest argument for VT is not that Democrats might win the midterms. It is that global capitalism will likely continue evolving, and owning a diversified share of that growth offers a compelling long-term investment proposition.

My strategy would be simple: take advantage of the potential election opportunity, establish a position in VT, reinvest the dividends, keep contributing and give compounding time to work.

Rather than trying to predict the next political winner, invest in the long-term productivity of the world.

Disclaimer: This article is for educational and informational purposes only and does not constitute personalised financial advice or a recommendation to buy or sell securities. Historical returns and hypothetical projections are not guarantees of future performance.