Tom’s Thoughts: Don’t Let Politics Derail Your Plan
Now seems to be a good time to invoke Rudyard Kipling: “Oh, politics is politics, and investing is investing, and never the twain shall meet in my financial decision-making.” Or maybe that was from Dr. Seuss; I was never very good in English class. But the point stands: never let your political views impact your investment decisions.
Studies have shown that political views do impact financial decisions, and this applies to all of us. (If you think it doesn’t consider starting here and coming back later.) Further, Kempf and Tsoutsoura found that “The effect is more pronounced in periods of high partisan conflict and for [those] who vote frequently.”
Humans are bad at forecasting in general, but possibly one of the most interesting and relevant biases is that we’re bad at predicting futures we don’t want to see happen. And when we’re proven wrong, we tend to look for proof that the evidence is wrong instead of changing our views.
Having a diversified investment portfolio is a goal at any time, but it makes even more sense to have a well-constructed portfolio in place before the election, because having that structure in place gives you more confidence to ride out whatever might happen in the markets. If you don’t have a plan, it’s much easier to succumb to the emotions and fears that short-term news can provoke. And what if the results of the election are contested one way or the other? It’s a sample size of one, but the last time election results were contested, the market did nothing other than follow the general trend it was already on. (Tip of the cap to Blaire, who is another fantastic advisor in New Orleans.) Have a plan, and stick to it.
And regardless of which side of the aisle you sit on, or if you’re standing in the aisle, or if you’ve stood up and walked outside, keep these two tips in mind:
- Don’t assume you know what political outcome will occur – and be most wary if you project the outcome you want.
- Definitely don’t assume you know how markets will react to your projected outcome.
And yes, this has largely been a rehash of something I wrote almost two years ago – but it bears repitition.