There is a well-worn saying about proper etiquette when meeting someone for the first time or when in the presence of mixed company. In truth, it is more of a warning. It goes like this, “Never discuss politics, religion, or money.”
In Nemaha County, we may need to add a fourth forbidden subject. Never discuss politics, religion, money, or windfarms when in mixed company.
These topics are too charged. They are too controversial. When trying to make a good impression, it is too risky, the thinking goes, to broach these subjects.
There should be a similar admonition when it comes to investing. The admonition involves two of the three topics from the initial list: politics and money. Simply put, when it comes to investing, the best advice is to never let politics influence your investments.
That advice is chronically ignored, usually to the investor’s detriment.
It seems the conviction with which one holds his or her political views is a good proxy for how likely they are to make portfolio decisions based on political events. The stronger the political views, the more adamant they are to express those views via their portfolio. And that expression usually comes in the form of investing more or less of their portfolio in stocks.
It happens most often in presidential elections, and it cuts both ways.
A dyed-in-the-wool Democrat says he wants nothing to do with stocks if the Republican hopeful wins the White House. A card-carrying Republican says she will own an all-bond portfolio if the Democratic candidate takes the election.
In both circumstances, they are fearful the wrong person ends up leading this country, causing damage to the economy, and ultimately hurting the performance of stock investments. The fear is the same. The only difference is who they are worried about.
Unfortunately, mixing politics and your portfolio is likely to induce unnecessary pain.
Anyone who sold U.S. stocks when President Trump was hailed the victor in 2016 has missed out on roughly 45% in gains in the 32 months since then. That is more than 15% per year.
The problem with letting politics infiltrate your portfolio decisions is that it misses the whole point of investing. When we invest our savings in the stock market, we are placing a bet. The bet is that the companies in which we invest will meet their customers’ needs in valuable ways for the foreseeable future.
Good investing is about harnessing the power of inventive people and diligent workers, who strive to make their companies better, more profitable, and more productive over time. The fact that a Democrat or a Republican sits in the Oval Office, or that one party or the other controls Congress, is irrelevant. The inventors and workers of America do not pause because the “wrong” person is in office.
Sure, politics can impact companies through regulation, legislation, and taxation. But the market quickly adjusts to those new realities. Not only that, regulation that hurts one industry may be a boon for another, partly cancelling out the negative effects that were feared in the first place.
Keep in mind, if your favored candidate does not make it into office and you make a portfolio decision as a result, you could do well. You may get it right. You are just as likely, however, to get it wrong. These things cannot be predicted with any kind of precision.
Making investing decisions based on one man or woman, or one party, is not investing. It is speculating. The president has a lot of power, but it is not absolute. The same goes for Congress.
It would take a lot to derail the amazing market system we have nurtured in America. So, when it comes to politics, join a rally or stage a peaceful protest. But for your own sake, leave your portfolio out of it.