CHAPEL HILL, N.C. — It’s time to put the election behind us.
I say this not as a political judgment
but as investment advice: Our job now is to be as objective as possible about
the future course of the economy in general and the stock market in
particular—and not let our partisan political passions affect our judgments.
That’s easier said than done,
however. Social scientists have found that our partisanship continues to
influence our investment decisions long after the focus of our partisanship has
long since passed. So don’t think that your joy or agony over the outcome of
last week’s election isn’t affecting your judgment.
Take what happened four years ago: Many Democratic voters initially bet that the stock market would crash under a Donald Trump presidency, and they persisted for the subsequent four years in being far more pessimistic about the economy than Republican voters.
That pessimism didn’t work out, needless to say: Since Election Day 2016, the S&P 500 index SPX, -0.15% has produced a total return of 15.3% annualized; the Nasdaq Composite COMP, -1.00% has done even better, producing a 23.0% annualized return.
Just the opposite of the Democrats’ pessimism four years ago is emerging today: Many Republican voters are far less optimistic about the next four years than Democratic voters.
Letting partisan beliefs affect your portfolios is hardly new. Consider a study that appeared in 2017 in the Journal of Financial Markets, entitled “Political climate, optimism, and investment decisions” and conducted by Yosef Bonaparte of the University of Colorado, Alok Kumar of the University of Miami and Jeremy Page of Brigham Young University. Upon studying investor behavior before and after a number of U.S. elections over the last three decades, they found that “when the political climate is aligned with their political identity, investors increase allocations to risky assets and exhibit a stronger preference for high market beta, small-cap, and value stocks.”
To state the obvious: If we were
able to keep our partisan political beliefs at bay while making our investment
decisions, there would be no systematic difference between the investment bets
made by Democrats and Republicans. That isn’t to say we would all agree. But
our disagreements wouldn’t be falling along partisan political lines.
Note that partisanship affects more than just our preferences for high beta, small-cap and value stocks. It also influences the industry and sector bets we make. Many analysts prior to the election considered certain sectors to be better bets in a Biden presidency than in a Trump presidency (such as renewable energy), while others were deemed better bets if Trump were re-elected (such as cloud computing). In fact, as I argued in a column a couple of weeks prior to the election, such predictions should be taken with little more than a grain of salt.
Perhaps the best defense against
letting our partisanship influence your investment bets is to subject them to
the scrutiny of those on the other side of the aisle. This can take any of a
number of forms, but the idea is to avoid surrounding yourself with those who
already agree with you. Democratic investors over the last four years weren’t
well served by being in an echo chamber that only contained other Democratic
investors, and the same will be true for Republican investors over the coming
Joining an investment club is one good way of doing this, according to Richard Geist, president of the Institute of Psychology and Investing and a former member of the psychiatry department at Harvard Medical School. Alternatively, Geist told me in an interview a couple of years ago, “you could also pick one or two colleagues by which you run your ideas, or subscribe to the newsletters or blogs of a few respected investment gurus.”
Regardless, he added, we should be sure to engage with
those who have different political beliefs. “The key thing to avoid is picking the club,
colleagues or gurus simply because they agree with you; instead, you should
pick them precisely because they may very well disagree with you.”
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.