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RP: It can be tempting as an investor to let our political opinions influence our decisions.
If for example the candidate or party of our choice looks set to win an election, and we’re feeling optimistic about the future of the economy, we may want to increase our exposure to stocks. But it’s a dangerous strategy.
TE: First of all I should just say that there’s nothing wrong with having a political view, but I think translating that into an investment portfolio is maybe not the most productive use of time. There are other more important changes that you can make that are going to have a closer link between what you want to achieve and the outcomes you generate in your portfolio.
RP: Recent history has shown us that election and referendum results can be very unpredictable. Often, the opinion polls get it wrong. But even if we knew the outcome in advance, it wouldn’t necessarily help us to make money on the stock market.
TE: So if you gave me a crystal ball, and it would predict the result of every election over the next year or so, do I think I could make money on that? Yes, I think you could, but on the flip side, one: particularly more recently, politics is quite hard to predict, it’s not easy, it’s embarrassing the experts.
Second, the reaction you see from the markets isn’t always the one you might expect, and I’d point out the 2016 US election in this context, where at least in the run up to the election, many commentators were saying that if Donald Trump became President Trump there would be a huge sell off in all dollar assets, a sell off in equities, a sell off in bond markets, a sell off in the US dollar. That was the smart view heading into the election, and then of course, in the result, nothing like that happened.
RP: Another problem is that opinion is sharply divided over which parties are best for stock markets. True, markets tend to like governments that are business friendly, and cut taxes. But the statistics show, certainly in the US and the UK for example, it really doesn’t make much difference which party is in power.
TE: We can take a look at the strict record, and that says ok, on average, the DOW Jones industrial average, the S&P 500, have done marginally better under the Democrats. However, and this is why it’s disputed, there haven’t been a lot of changes in administration, either in the UK or in the US. And secondly, it’s incredibly dominated by a few events. You know, so, should we blame George Bush, George W. Bush for the global financial crisis which had really taken hold by the time that Barack Obama took charge? Should we blame Herbert Hoover for the 1929 Great Depression? If you do, you can see why that’s going to have a really strong impact on the data.
RP: In summary, you should avoid letting your political opinions influence your investment decisions. It might look like an easy way to make money, but it’s not.
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