How should Fools handle the nail-biting US election?

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After months of campaigning (or should that be feuding?), Hillary Clinton and Donald Trump will soon learn just how persuasive they have been in getting their fellow Americans to the polls and winning their votes. By midday on Wednesday, we should have a reasonably good idea as to who will be the 45th US president.

A few weeks ago, a Clinton win seemed almost certain. Then last week’s email-related ‘revelations’ undoubtedly handed the momentum to Trump, leaving the result too close to call. But with the FBI dramatically saying it found nothing illegal in the emails, things could change. Even so, markets have now begun to consider the possibility that the divisive Republican could pull off the most unexpected of victories.

Let’s be clear: regardless of who triumphs this week, markets will react. But how should Foolish investors respond?  

What could happen…

It seems likely (but never guaranteed) that a Clinton victory would bring a relief rally of sorts to UK equities. One of the few exceptions to this might be in pharmaceutical stocks, considering the former Secretary of State’s determination to end ‘excessive’ pricing. It won’t be surprising if the share prices of FTSE 100 favourites like GlaxoSmithKline and Astrazeneca come under pressure if Clinton prevails. Energy stocks might also lag the market, given her desire to turn American into the world’s clean energy superpower. 

If Trump wins, expect something approaching the opposite of that just described. A shock victory would put pressure on stock markets in general, at least in the short term. Energy stocks might drop less than most, however, given his positive attitude to the fossil fuel industry. The aforementioned pharmaceuticals could also make gains, simply because Clinton’s views would no longer carry any weight. Over time, of course, the markets will settle, particularly when it’s realised that getting initiatives through Congress will prove extremely difficult (as Barack Obama knows only too well).

Some sectors look set to benefit regardless of who wins. Defence and security spending will surely rise whoever gets the keys to the White House. If this happens, giants like BAE Systems and G4S could benefit. Construction, industrials, healthcare and technology stocks may also get a boost.

…and what Fools should do…

While no one knows how things will play out, we do know that knee-jerk reactions from investors rarely work out well. 

Think back to June. In the post-referendum bloodbath that was British politics, many stocks tanked. The FTSE 100 dropped 6% in just two working days. The FTSE 250, generally regarded as a better reflection of the UK economy, fared worse, down roughly 14%. Days later, the markets rebounded. By October, the FTSE 100 and FTSE250 were both challenging record highs (reaching 7,097 and 18,342 respectively). The former was no doubt boosted by many of its constituents benefitting from sterlings’s fall, the latter by the realisation that the market had overreacted and UK plc would carry on as usual, for now. Not only did those who sold shares in the immediate aftermath of the referendum crystallise loses, they also missed the rally back up.

As such, I suspect the best course of action for UK investors over the next few days is actually very simple: do as little as possible. Clinton or Trump, the next few weeks won’t matter all that much if you hold a sufficiently diversified portfolio.

One other thing you should do

Learning the identity of your greatest adversary is one of biggest challenges in investing. It's not other private investors, day traders or the big institutions. Rather, it's likely to be the very person staring back at you in the mirror.

It's understandable if UK investors are starting to feel nervous about the outcome of Tuesday's vote. However, excessive worrying can lead to impulsive decision-making which, in turn, can be very damaging for our finances. If you're keen to avoid making expensive errors in your investing career, I strongly suggest you read a special report produced by the experts at the Motley Fool. The Worst Mistakes Investors Make contains some excellent hints and tips on how you can avoid making the most common blunders.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.