“If you mix your politics with your investment decisions, you are making a big mistake.”
– Warren Buffet
Last month, we discussed the illusory nature of “certainty” in the pursuit of investing. This month, we study the dangers of making investment decisions based on your political views.
Save the Date for October 17th
We have been publishing our Great Investors article series for over 10 years now, and this series has consistently been our most popular content every year. We thank our loyal readers, and we truly appreciate your comments and feedback over the years.
As you know, we have changed the format for our Great Investors series from a monthly written commentary to a quarterly webinar format. We will deliver a brief talk, summarizing our outlook on current events, delivered in the same style you have come to appreciate in our monthly article series. We will then have ample time for Q&A and discussion, in order to address any additional questions you may have.
Our next webinar will be held on Thursday, October 17th, and will be available via online live stream and in-person for those who can attend. Please feel free to register HERE.
A Dangerous Myth
One of the most dangerous and yet most persistent myths in the world of investing is that it is critically important to the Stock Market who wins the next Presidential election. Every four years, far too many people make short-term investment decisions based on what they hope — or fear — the outcome will be.
For many people, the presidential election in the US represents a life or death referendum on the state of our nation, and our American values and way of life hang in the balance. Nothing can possibly be certain until the election has occurred, and we all yearn for the certainty that will result when the ballot results are finally tabulated in November.
As investors, our discomfort with election year uncertainty can paralyze us and act as a significant impediment to making rational investment decisions. Every four years, investors everywhere anticipate the November elections with great trepidation, and often find themselves wondering if it would be better to just get out of the equity market.
Many ask, “Should I just take to the sidelines until after the election — when things are more settled?”
The Record of History
Given the persistence of uncertainty in the world, the most important skill in investing is the ability to practice rationality under uncertainty and to make rational and reasonable decisions despite the emotional toll that uncertainty may be taking on us. This also means that history is the best guide to the long-term future. The best way to predict what might happen in the long-run future is to understand what has happened in the long-run of history.
This year’s election promises to be as emotionally volatile as any in recent memory, as the ideological divide between our parties appears as wide as it has ever been. Many people actually believe that this election is life and death and that the very future of the American way of life hangs in the balance. No wonder many investors are feeling jittery.
However, for those who can take a break from the daily headlines and media noise, it may be worthwhile to review the history of equity market behavior, regardless of who occupies the White House. Truist CEO Keith Lerner recently published this wonderful reminder that not only don’t elections matter, but the occupant of the White House doesn’t either:
Adding their voices to make this same point, Charles Schwab analysts Liz Ann Sonders and Kevin Gordon recently published the chart below, pointing out that:
“Covering the modern period for the S&P 500, investing only when a Republican was in the White House, a $10,000 initial investment in 1961 would have grown to more than $102,000 by 2023. On the other hand, the same $10,000 investment would have grown to $500,000, investing only when a Democrat was in the White House. The real moral of the story [is that] the same $10,000 initially invested in 1961 would have grown to $5.1 million by just staying invested, without regard for the political party in power.”
Donkeys, Elephants, Bulls, and Bears
If you are like most Americans, you probably also have very strong feelings about who should win this particular election and equally strong feelings about the total disaster that will befall our country if your preferred candidate or party doesn’t win. You might be starting to worry about the future of your investment portfolio given the current uncertainty and feeling tempted to let your emotions about the political climate impact your investing decisions.
I am here to tell you that would be a mistake. The record of history demonstrates quite clearly that:
- It doesn’t seem to matter who the President is.
- The broad equity market goes up most of the time, regardless.
- It’s best to just remain invested.
The fact is that Mr. Market actually cares very little about who is in the Oval Office and is only concerned with the functioning of the economy. Although governmental policies can influence economic performance, there is not much correlation between economic progress and any particular political ideology. Although the President can influence the economy, he or she is not an emperor with unlimited power. Our Founding Fathers built a system of checks and balances, which are intended to limit the power of any one individual to influence the future of the U.S. too much.
It is likely that the emotions stirred up by the next 2 months of political rhetoric will provide a true test of your emotional control. So, here is our advice and do this now before the election cycle really heats up:
1. Close your eyes and imagine for a moment that your preferred candidate doesn’t win the election and that his/her hated foe gets elected instead.
2. Feel the emotions and feel the anger and frustration of facing 4 years with that person in office. Get fired up.
3. Then, take all that emotion, lock it away in a drawer somewhere, and don’t let it get anywhere near your investment portfolio.
Helping Those You Care About
Over the last two years, the faith of all long-term investors has been severely tested. As must happen every few years, we were basically required to do just one big thing: reject the idea that this time it’s different and hew to the belief that this too shall pass. We must not doubt that we’ll get many additional opportunities to practice patience and discipline in the years to come.
Successful investing, while always fundamentally simple, will never be easy. You may have a family member, colleague, or friend who perhaps did not fare as well during the 2022-23 bear market and who you feel might have benefited from the sort of advice you were receiving. Should that be the case, we would certainly appreciate your introducing us to them. We very much enjoy working with you and would welcome the opportunity to offer the same level of planning and service to people whom you care about.
You are more than welcome to bring a friend or family member to our event on October 17th or to share the recording of our discussion that night.
As always, our sincerest thank you for being our client. It is an honor and a pleasure to serve you.
All the best!