Why You Should Leave Politics out of Investing
We live in a world where on any given day, one person’s tweets can move the stock market. That person, of course, is the current President of the United States. Whether it’s about trade policy or a specific company, these short missives can send shockwaves through everything from equities to currencies.
This leads to an interesting question: to what extent should investors take politics into account when making decisions? While tweets may get a lot of the headlines these days, the presumed effects of the political realm on financial markets are much deeper. Many investors formulate strategy based on issues such as the next presidential election, Congressional actions, and the degree to which regulations are being increased or rolled back.
You can see the appeal of this kind of thought process. It’s really an attempt by an investor to draw a causal link between something in one area (politics) and its consequences for another (markets).
The problem? It’s not a reliable investment strategy.
A great example of how it can backfire is the 2016 U.S. election. Hillary Clinton was the overwhelming favourite, and there was an overwhelming consensus that a Donald Trump win would be disastrous for markets.
As the results started pouring in on election night, traders started to realize that Trump might actually win. And with this recognition, anything tied to the overall U.S. stock market plunged. But then an interesting thing happened: markets reversed sharply higher and pretty much never looked back.
This isn’t to give credit to Trump, by the way. But it’s a lesson that anyone who sold their stocks based on the possibility of him winning suffered immensely. It’s also a good reminder of an adage we love: Investing is like a bar of soap. The more you touch it, the smaller it gets.
Focusing on Politics Takes Your Eyes Off the Prize
When investors make moves based on political issues, they take their eyes off the ultimate prize: solid returns based on a long-term, diversified framework. The truth is, as financial expert Nick Murray has observed, there’s always something political you could worry about. This is true not just at the domestic level but internationally as well: there isn’t a day without some sort of geopolitical tension somewhere.
Rather than obsess over who will be elected, what they might do, or any other political variable, the wise investor understands that they should spend their time in a more efficient way. And that means owning quality equities and fixed-income securities that can stand the test of time.
It’s an approach that sure beats trying to guess what the next tweet might be.