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Monday, 31 August 2015 00:00

Playing Politics in Your Portfolio

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In case you missed it, we are well into another presidential election season. While I'm not sure we ever took a break from the 2012 round, already the herd of 2016 hopefuls are canvasing the country. Over the next year, Republicans and Democrats will parade themselves in front of every TV camera they can find and pander to every potential voter they stumble across. During that time, you will hear expert after expert talking about the impact of each candidate on everything from stocks to schools. I'm not going to tell you who to vote for or even which candidate will be best for your portfolio. What I will tell you, however, is be careful in making long-term plans based on what might happen next year.

Political affiliation can often resemble sports fandom. And just like fans of any team, supporters of any political party are biased. Why does that matter? Well, it can actually have a pretty significant impact on your retirement. In a 2012 research paper, Yosef Bonaparte, Alok Kumar, and Jeremy Page found that a person's political affiliation affected his view of the economy. From the abstract, "Individuals become more optimistic and perceive the markets to be less risky and more undervalued when their own party is in power. These shifts in perceptions of risk and reward affect investors' portfolio decisions." So Democrats likely held less risky assets during 2000-2008, and then held more risky assets from 2008 until today. Republicans would have done the opposite – more aggressive from 2000-2008 and more conservative from 2008 until today. Those time periods are significant – a two term president can account for 20% of your time in the workforce.

When creating an investment plan, we don't try to predict whether Republicans or Democrats will control Congress or the presidency. For the Democrat who was conservative during the Bush years but then loaded up on risky assets as Obama coasted to an easy victory, the end of 2008 was not a great time to be putting more money into stocks. And for that Republican that was aggressive from 2000 to 2008, you might have avoided some losses, but also missed out on a huge bull market afterward. And that doesn't even begin to take into account where you are in your own investment plan. If you are about to retire, it doesn't matter if Wonder Woman is President and Harry Potter is her VP, you shouldn't be piling into risky assets at that stage.

Are political leaders influential in the economy? Absolutely. Changes in regulation or policy can totally reshape an industry. The problem, of course, is trying to capture any investment gain from those changes. In 2010, the general consensus was that the Affordable Care Act would drive down profits for health insurers. Removing insurance limits and exclusions for pre-existing conditions would cripple them. What has happened, however, has been much the opposite. While the analytical process was right, the conclusion was wrong. Sometimes, regulation leads to unexpected consequences – both good and bad. How you expect policies will affect the economy likely depends on whether your party is implementing them or not.

So what do you do about political bias? The best thing to do is to have a personalized investment plan that reflects your goals. And when the political winds blow, you don't change your plan. That second part is much harder than it sounds. In general, people are terrible at managing biases, and we often find very compelling reasons why we aren't biased. One benefit of being an advisor is that we are a step removed from the assets we manage and aren't as emotionally attached. We also benefit from a diverse group of experts in our office that hold a wide range of beliefs. So whatever happens next year, remember to leave politics in the voting booth and out of your portfolio and know that we'll do the same.

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