There’s a saying that you shouldn’t mix business with pleasure. Far less well known is the concept of never mixing personal finance with politics.
Unless you’ve been living in some remote corner of the world without access to the internet, you’ve probably heard something about Robert Mueller’s testimony before Congress, the first round of Democratic primary debates, and other political developments. And no doubt you have an opinion on all these things, just like most people. We certainly do. But political opinions and financial facts rarely make good bedfellows.
Here’s what we mean. Shortly before the midterm elections last year, a client asked us a political question. “Before we answer,” we replied, “are you asking us as your friends, or as your financial advisors?”
You see, the answers are not the same. That’s because, as financial advisors, our job is not to manage your portfolio or financial plan with a political bent. There are two main reasons for this. First, let’s look at:
Politics and the Markets
These days, most people tend to be very passionate about their political beliefs. But the fact is, neither party tends to have much impact on the markets compared to the other. Historically, the Dow has gone up an average of 9% every year a Democrat lives in the White House. With Republican presidents, the number is 6%.1 (Note, these numbers do not yet factor in President Trump’s time in office.) The difference between those two numbers is small and can be attributed to a whole range of factors, not just politics.
Even major geopolitical events rarely have much effect on the markets. Or rather, they rarely have a sustained effect.
For example, take the case of “Brexit”. When the United Kingdom voted to leave the European Union back in June of 2016, it took most investors by surprise. The day after the vote, the Dow fell over 600 points, and then another 250 points a few days later. 2 But before even a month passed, the Dow recovered – and even climbed to a new record high.3
Now, we are not saying politics do not influence the markets, because they do. The point is, politics tend to have far less of an effect than people think. In fact, if you were to make a list of things that consistently move the markets one direction or another, politics would be far down the list.
For that reason, when listing all the reasons for making a financial decision, politics should be far down that list, too.
It doesn’t matter whether you are liberal, conversative, or something in between. As human beings, we all have biases and blind spots.
That’s the second reason why it’s unwise to mix politics with personal finance. You see, when we do that, we run the risk of becoming selective as to which facts and data points we consider. Without even realizing it, we often gravitate towards the ones that seem to confirm our existing beliefs. We rationalize why this bit of data matters – because it feels right, it must be right! – and why that bit of data doesn’t.
To put it bluntly, making financial decisions based off biased or overly narrow information is dangerous to our long-term goals. You certainly wouldn’t want your financial advisor to do that. We certainly don’t want you to do that, either.
The reason we’re telling you all this, is because we are on the verge of moving into a new election cycle. That means we’re all about to be subjected to a dizzying assault of political news, analyses, and opinions. Everywhere you turn – from TV to radio, from Facebook to the yardsigns in your neighborhood – will be saturated with it.
Of course, that’s not necessarily a bad thing. After all, we live in a representative democracy, and a democracy lives or dies by the participation of its people. So, as we enter a new political season, we encourage you to have opinions. Express them. Get involved. Just remember that your financial decisions should stand on their own, free of any angst or worry that politics might cause. Don’t make important decisions based on which candidates you think will win or should win. Base them on sound financial planning and actual financial facts.
Most importantly, always remember that we are here if you have any questions or concerns.
1 “How the Presidential Election Will Affect the Stock Market,” Kiplinger.com, March 1, 2016.http://www.kiplinger.com/article/investing/T043-C008-S003-how-presidential-elections-affect-the-stock-market.html
2 “Dow plunges over 600 points as U.K. ‘earthquake’ crushes global markets,” CNN Money, June 24, 2016.http://money.cnn.com/2016/06/23/investing/eu-referendum-markets/index.html?iid=EL
3 “Stocks have never been higher,” CNN Money, July 12, 2016.http://money.cnn.com/2016/07/12/investing/dowstock-new-high-record/index.html