The Problem Of Political Bias
Political biases create problems for investors, causing them to stray from even well-thought-out financial plans. Imagine the nervous investor who sold equities based on his views of a Trump presidency. While those who stayed disciplined have benefited from the rally, those who panicked and sold not only missed the bull market, they now face the incredibly difficult task of figuring out when it will once again be safe to invest.
It may also be worth noting that Warren Buffett’s Berkshire Hathaway has been persistently buying since the election, despite his having supported Hillary Clinton. Buffett doesn’t let his biases impact his investment decisions, which should be a clue as to whether you should allow your biases to do so.
I know of many investors with Republican/conservative leanings who were underinvested after President Obama was elected. Now it is investors with Democrat/liberal leanings who must face their fears.
It’s important to understand that, if you sell, unfortunately, there’s never a green flag that will tell you when it is safe to get back in. Never. Thus, the strategy most likely to allow you to achieve your goals is to have a plan that anticipates that there will be problems, and to not take more risk than you have the ability, willingness and need to take. Lastly, don’t pay attention to the news if doing so will cause your political beliefs to influence your investment decisions.
There’s strong evidence that the political climate impacts investors’ views of the economy and the stock market, and that it affects their investment behavior. Specifically, individual investors’ returns improve when the political regime favors their political party, and vice versa.
This result is due to two factors. When their party is in favor, investors tend to increase their exposure to systematic risk and, thus, earn higher returns. They also tend to use more passive strategies, reducing costs.
Unfortunately, investors often make mistakes with their money because they aren’t aware of how decisions can be influenced by their beliefs and biases. The first step to eliminating—or at least minimizing—mistakes is to become cognizant of how our financial decisions are affected by our views, and then how those views can influence outcomes. Being aware of your biases and acting accordingly can help you make better investment decisions.
The bottom line is that, just as you shouldn’t let the latest economic news cause you to abandon a well-developed financial plan and shift your asset allocation, you shouldn’t let the political climate do so either. As the “Oracle of Omaha” Warren Buffett stated in Berkshire Hathaway’s 1996 annual report, “Inactivity strikes us as intelligent behavior.”
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.