You want to make sure consumers don’t let our politics influence our investments. Why is this on your mind?
In the current political environment, it can feel like everything is political. But if you mingle your politics and your money, it can have real financial consequences. I cannot overstate the importance of divorcing personal politics from your investing decisions. It can be difficult to do at times – especially when you want to be true to your values – but it can lead you astray and cost you money.
How do our political beliefs impact our investing?
Put simply, they guide whether we are more optimistic or pessimistic about the economy and the markets. According to a study on the effects of political beliefs on investor behavior – titled “political climate, optimism, and investment decisions” – our political views can have big consequences for our portfolios.
The study covered the three presidential elections. Researchers found that when Bill Clinton, the Democrat, won in 1992 and 1996, Democratic voters had a more positive outlook for the economy, and were more willing to incur portfolio risk, more likely to favor domestic stocks, and did not trade as frequently.
Republicans, on the other hand, tended to do the reverse of what Democratic voters did. But, when Bush won the 2000 election, the roles were swapped. Republicans were more optimistic and Democrats more pessimistic. Both sides let their political beliefs influence their investment choices, and the pattern has gotten stronger as the nation’s political climate has grown more polarized.
What is behind this bias?
Two words: Human nature. When people have an emotional interest in something, it becomes more difficult for us to be objective, because we selectively perceive events. Essentially, we edit out any facts or signals that conflict with our preferences. This is even true for what we see! Studies found we are biased in our visual perception – literally, how we see the world – because of our belief systems. And this is not something that only happens sometimes, it is constant.
What should we be doing?
When there is great uncertainty in the markets, you have heard me say “Don’t do something, stand there.” When it comes to your investments and your politics, it is very similar. While you might be tempted to think about how politics will impact your investments, then try to adjust your portfolio accordingly, resist the urge!
You should continue doing what I hope you have always been doing, making regular contributions to your retirement portfolio and ignoring the static. Remember that you are in this for the long game. Tune out the talking heads, and focus on consistency. There will be ups, and there will be downs, bad policy and infuriating politicians. But the best thing you can do is stay the course.
On a related note, some listeners are asking why the markets are reacting to the new administration the way they are. What is driving the positive movement?
First, it’s important to remember what the recent rise, known as the Trump rally, is built on. The market had already reached previously unseen levels because the fundamentals of the economy – be it the strong labor market and low unemployment, wage growth, consumer confidence or corporate balance sheets – are very strong. So, the current market run has a solid foundation.
On top of this, the market anticipates the future, and investors see a possibility that one-party rule in Washington could mean some policy proposals that benefit individuals and companies could be implemented. For example, the administration’s proposed tax cuts on individuals and corporations could increase profitability for companies and put more money in people’s pockets.
It is also possible that companies could see lower compliance costs if the White House’s deregulation plans pan out. These would both be good for corporate America. But we know God is in the details, and there are several big “if’s” involved, especially with this administration.
Any parting thoughts for us?
Just remember, when picking a candidate or picking a cable news station, chose whatever option suits you. But when you are focusing on your investments, use your head, not your heart. You will do best when if you take an objective approach, and you keep your politics separate from your portfolio.