Hello everybody welcome back to the blog. I am excited to be back and owe you all a big apology for going dark for 8 whole months! It was a nice break and I’m hoping that going forward I will do at least 2 blogs a month.
Now let’s just into today’s blog, about what happens when you mix politics and investing.
For some background, I have been a financial advisor since 2015, right before Donald Trump announced his run for the presidency. So I have worked through that campaign of Trump v Clinton, Trump’s presidency, Covid and all the political fights and worries that brought, Biden’s presidency, the highest inflation in 40 years, a war, and I’m sure plenty of other things that I’m missing.
My point is: in terms of politics and current events, a lot has happened over the last 8 years. And I have met countless clients, potential clients, and friends who have, for one reason or another, wanted to use these events as a reason to change their investment strategy.
Some sold everything because Trump became president, and others sold everything because Biden became president. Other people have looked at the news, like the Russia-Ukraine war, as a reason to not get invested or to not stay invested in the stock market.
So the title of the video is about politics and investing, but I do want to make the point that this also applies to current events.
So what exactly happens when you mix your political beliefs with your investing strategy? Well, some academics got together and they studied 60,000 individual investors from 1991 to 2002.
Let’s dive into the study and what they found:
“The study (which was also written about by the WSJ) analyzed extensive survey data gathered by Gallup and the trading histories of more than 60,000 individual investors at a major brokerage firm. The researchers— Alok Kumar of the University of Miami, Jeremy Page of Brigham Young University and Yosef Bonaparte of the University of Colorado at Denver and director of that institution’s Global Center for Political Finance—controlled for all the major demographic factors, such as age, race, gender, education, and wealth and income level.
The findings: After the 1992 and 1996 elections, when the Democratic candidate won the presidency, Democratic voters tended to have greater confidence about the future of the economy than Republican voters. That confidence translated into them:
1) being willing to incur more portfolio risk (ie, put more in stocks and less in bonds)
2) to favor the stocks of domestic over foreign companies
3) to trade less frequently.”
At the same time, Republicans were less confident about the economy and therefore tended to do the reverse of what Democratic voters did. In other words, they were more likely to sell their stock positions, they favored international companies more, and they traded more frequently.
A brief interruption: over the last 100 years, stocks have outperformed bonds, domestic stocks have outperformed international stocks, and people who trade less frequently have better investment returns than people who trade more frequently. SO: if your party wins, you will act in accordance with better investment principles.
But before you start saying that all Republicans are a bunch of idiots because of how they acted after 92 and 96, I need to tell you that after the 2000 election, when a Republican won the presidency, the same exact pattern emerged, but just with the parties switched.
So the Republican voters bought more stocks, they traded less, and they tilted their portfolios in favor of domestic stocks as opposed to international stocks. And the Democratic voters did the opposite.
Over this 12 year study, the results show that if your political party wins an election, you will become a better investor, and if the party you don’t like wins, then you will become a worse investor.
And this wasn’t just individual investors who were influenced by their politics. it was also so called professional money managers as well.
The researchers also found that, in the months leading up to the 2000 election, Democratic money managers invested more heavily in stocks that supposedly would benefit if Mr. Gore were to win, while Republican managers invested more heavily in stocks that presumably would benefit from a Bush presidency. In other words, both sides let their partisan fervor guide their investment choices.
What is the result of all this? For individual investors, folks like you and me, when our favored political party is in power, we get 2.7% better returns per year than we would if the party we don’t like is in power. And what’s important to note is that this isn’t any kind of sophisticated strategy you need to employ. In fact, it’s obvious.
Yet investors are continually shooting themselves in the foot, because when some politician they don’t like gets elected, they adopt poor behaviors and hurt their returns by that 2.7%.
What does that mean over 8 years, two terms for a president?
If you have 100K in your accounts, and you get 8% returns for 8 years, you’ll have $185,093.02 at end of 8 years. But if you shoot yourself in the foot and make investing decisions based on your politics, and only get a 5.3% return per year, then at the end of 8 years you will only have 151,156.55. That’s 18% less in your account, just because you didn’t like the party in power.
So please, folks, whatever you do, don’t change your investment strategy because you don’t like who won the last election. Yes, I get that our politicians are frustrating, but we’ve had over 100 years of the stock market performing well under both Democrats and Republicans, and we’ve seen that the stock market can continue to deliver solid returns despite a Great Recession, World Wars, multiple crises in the Middle East, worldwide pandemics, and much more.
My best advice for you is to put together a solid investing strategy of low cost, well diversified funds, with the appropriate asset location, and then go spend your time with something far more enjoyable than politics.
Okay, that’s all I’ve got for today. Have a great one and talk to you soon.