Why You Want To Keep Your Politics Separate From Your Investing
As a financial advisor, there’s a trend I see every year, but it’s especially prevalent during election cycles: people making investment decisions based on their political inclinations.
During this time of year, they’ll fret over the possibility that the candidate from the party they don’t support could win the election. After the president is elected, they’ll be swayed to act a certain way based on the outcome — especially if it’s the candidate they didn’t want to win.
Most of the time, that action is actually inaction. These people will stop saving and investing, worried that something is about to happen if so-and-so gets elected. It’s total financial paralysis. Other times, they’ll actually sell all their investments, thinking they’re protecting themselves. In both cases, what they’re typically doing is hurting themselves and their investments.
Any time we meet a client with these concerns, we assure them that the behavior of the market is not affected by who is in the White House to the extent they believe it will be. We show them that the S&P 500 reacts independently of the president’s approval rating, and that by letting their politics steer their investing, they can potentially miss out on great investing windows.
I believe most investors know these facts already, so when I show them the data, I’m merely reminding them. But if that’s true, why don’t their actions always reflect this knowledge?
There are two factors at work, both of which we’ll explore in this article. Once we clear the fog, I’ll offer a couple of final takeaways for those struggling to keep politics and investing separate.
Our Perception Colors Our Reality
When we have deeply held political beliefs, it shapes how we view the world. Brian Andrew, the chief investment officer of Johnson Financial Group, uses a slide for his client presentation that makes this fact abundantly clear. According to data from CornerStone Macro, when asked whether economic conditions were “good,” how did Republicans and Democrats respond?
• 79% of Republicans said yes.
• 33% of Democrats said no.
As Andrew points out, we’re all looking at the same numbers: economic growth, unemployment, wage growth. The 46% difference of opinion comes from how respondents perceive the world.
When their candidate is in power, Republicans will generally focus on the positives and push aside the negatives. Democrats will typically do the opposite. The reverse is true when a Democrat is in the White House. This is confirmation bias at work — and it’s only getting worse with the 24/7 news cycle.
The danger of this bias is believing that perception equals reality. I’ve seen investors sell off huge chunks of their investments because they were convinced a newly elected president was going to come into office and hammer the sectors in which they were heavily invested.
Many of these investors can cost themselves and their families dearly with their knee-jerk reactions. Their perception that the sky was falling never came to pass.
A Misunderstanding Of Investments
The second factor at play is a misconception of how investing works. In my experience, the line between the public and private sectors is blurry for investors with political concerns.
Many believe (or have been told) that what the president says or tweets has the power to move the markets and wipe out their investments. I’m not saying these statements don’t matter, just that their impact is temporary. If the market shifts, it will likely shift back just as quick.
Here’s why: Setting aside U.S. Treasury Securities, most investments are in companies, not in the government. So, fiscal policy matters, just not over 24 hours like the news media sometimes will make it seem. What matters far more is what decision-makers at public companies choose to do, which is why prudence is required when investing in the stock market.
The winds of political change do blow across the business landscape, but the effects are often less pronounced or far different from what is expected. Certain industries may be forced to evolve or become nimbler due to a certain policy change, but that doesn’t mean you should sell all your stocks in that sector for fear of losing all your money. Capitalism is adaptable, so industries that you think might suffer under an administration will often maneuver and thrive.
The healthcare industry, for example, was radically transformed by the Affordable Care Act, which was signed into law in 2013. Despite the changes — including creating health insurance marketplaces and state exchanges and expanding Medicare — the healthcare industry did not implode. It evolved and continues to do so, especially in response to Covid-19.
What Matters More To Your Success
Most investors come to a fiduciary like my firm because they want to delegate decision-making around their investments. For the reasons we’ve discussed, many of them bring political worries to that first meeting. If they’re truly looking for guidance, we’re usually able to work with them.
But if they’re so deeply set in their beliefs that they can’t be swayed to abandon risky behaviors like freezing or selling all their investments based on who gets elected, we can’t manage around that and won’t take them on as clients. Why? Because they’re setting themselves up for failure.
If you’re still not convinced, here are two final takeaways I offer during meetings with potential clients. First, the equity markets are very forward-looking, which means the market may have already priced in the things you’re worrying about, so you’re one step behind. Second, and most importantly, politics matter less to your financial success than the decisions you make every day, such as living within your means and saving and investing your money.
I would never ask an investor to abandon their political beliefs. For the sake of their financial future, all I ask them to do is to keep their politics separate from their investing.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.