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Historically, the Dow Jones Industrial Average has recorded significant gains during the fourth year of a Presidential cycle, also known as the Presidential election year. The average Dow Jones performance during Presidential election years, since 1960, is a gain of 7.7%, with nine up years compared to three down years.

So why does the stock market typically do well in a Presidential election year? The answer, according to advocates of the theory, is relatively simple. According to Hirsch, the reason behind this cycle is that �incumbent administrations during election years try to make the economy look good.� During a Presidential election year, regardless of whether a Democrat or Republican is in office, the incumbents typically take actions to bolster the economy through tax cuts and higher spending. Furthermore, the Federal Reserve Board, which tries tore main neutral to politics, avoids raising or lowering rates during a Presidential election year. And, in theory, incumbents vying for reelection do their best to not upset the markets.

While Presidential election years, on average, have recorded profitable results for the markets, it is important to not discount the prior year�s performance. During the third year of a Presidential term, the calendar year before the Presidential election year, politicians are eager to pass legislation that will improve the economy before the reelection campaign officially kicks off. In the past four Presidential cycles alone, the average gain for the Dow Jones has been an impressive 26% during the third year of a Presidential term. And since the end of World War II, the S&P 500 has never suffered a loss in the full calendar year before a Presidential election. This held true in 2007, with the index up 4.8% for the year (despite the fact that it retreated toward the end of the year).

Dangers of Attempting to Time the Market

While the Presidential Election Cycle theory has proven to be relatively consistent over the years, there simply is no foolproof way to predict the behavior of the market. George W. Bush�s election in 2000, for instance, occurred at the height of the dot com bust, which resulted in a bear market. The current election year is proving to be a turbulent one for the stock market as well.

Simply selling stock in the first two years of a Presidential term could cause you to miss out on significant returns � the S&P 500 gained 7.1% in Bill Clinton�s first year in office, for example. In years one and two of his second term, the S&P gained 31% and 26.7%, respectively. And by investing only in the years leading up to a Presidential election, you would not have been saved from �Black Monday� � October 19, 1987 � when the Dow Jones Industrial Average lost 22.6% in one day.

There�s an old saying that successful investing comes from time in the market, not market timing. Many experts will also agree that determining the �best� time to get in or out of the market can be nearly impossible, and that for most investors, trying to time the market is not a practical investing strategy. Trying to determine exactly when one should aggressively invest or back out of the market takes a considerable amount of expertise and time to monitor market environments. And even the most savvy investors and advisors can�t guarantee that their predictions will be correct, since there are no guarantees how the financial markets will perform.

Action Items to Help Weather Turbulent Markets

There may be an advantage to staying in the market for the long term, versus trying to determine specific times to get in or out of the market. This advantage can best be explained with the concept of dollar-cost averaging. Dollar-cost averaging is simply investing equal or fixed amounts of money at regularly scheduled intervals. With this investment strategy, you will buy more shares when the price of your investment has declined, and fewer shares when the price has risen. Over a period of time, you may lower your average cost. Whether you are new to investing or a seasoned professional, dollar-cost averaging can help you cope with price fluctuations in a volatile market.

By dollar-cost averaging, you may reduce investment risk by not investing substantial amounts at the wrong time. In addition, dollar-cost averaging forces you to invest on a regular basis, as you would in a 401K plan, for instance. By investing on a regular basis, you can avoid making bad decisions based on emotions, such as the natural tendency to stop investing in a weak market.

It is important to consider that dollar-cost averaging does not assure a profit or protect against a loss in declining markets. Before embracing the dollar-cost averaging strategy, you should consider your ability to continue investing during periods of falling prices.