The most common question we hear from clients these days is some version of the emotionally charged question, “do politics affect my portfolio?”
It’s no surprise that everyone is wondering who will win and what changes will occur with the election around the corner. Changes could include corporate and personal tax rates, additional stimulus, trade with China, the Affordable Care Act, and energy regulation. Cutting to the chase, we conclude that politics matter little to the LONG-TERM investor. In a sense, we’d recommend not giving politicians too much credit for economic outcomes because companies themselves are also adaptable and typically last longer than a political regime or an administration. Market data presented in Robert Shiller’s book, Irrational Exuberance (2015), allows us to study markets back to the days of Ulysses S. Grant. A short sidebar—think how much the country has changed since then. The United States was recovering from the American Civil War. Alexander Graham Bell had just invented the telephone. Still, we’d have to wait a few more years for Edison’s light bulb, a few more decades for the first commercial flight, again decades until television, and well over a century for the iPhone. To make this data useful, we studied “real” returns, measuring how much better off you are after considering the general rise in prices (inflation). Here’s that data, by President, since 1871.
Data: Stock Market Data Used in “Irrational Exuberance” Princeton University Press, 2000, 2005, 2015, updated, through 2023
A few conclusions stand out:
- Market returns have been almost identical no matter which party is in office
Republicans have been in office 86 of the last 150 years, and the markets provided a 6.3% annual real return during their tenure. Democrats’ 64 years in office over that period provided a 7.7% return. If we exclude Herbert Hoover’s Great Depression term, we learn that returns have been almost identical, no matter the President’s political party.
- Compounding is the eighth wonder of the world (a saying credited to Einstein)
If your great, great grandparent had invested $100 for you back in 1871, you’d have over two million dollars today! While 7% a year doesn’t sound like much, it adds up to A LOT over time.
- Staying invested is crucial!
Let’s consider an alternative. What if you felt so strongly about politics that you only invested when your preferred party was in The White House, and the rest of the time, you withdrew your money, purchased a mattress, and stuffed the cash in it. It doesn’t matter if you’re a Democrat or Republican—investing that way over 150 years would have produced less than a penny for every dollar you should have earned! There have been both good and bad during both parties’ control. However, the best path for investment success is to remember what you’re investing for, point toward your future goals, and stay invested to get there. Being a business owner (yes, you’re a part-owner in businesses by holding stocks) can provide exceptional returns over the long run, but you must stomach the ups and downs of prices along the way. We stress-test your plans to handle these bumps. There are good reasons to sell, but we wouldn’t include politics as one of them. Your financial plan – your purpose – creates the roadmap to prepare for when you need the money, and we can sell well ahead of that time. We might sell on your behalf as well if the business we own together is competitively weakening, we see better opportunities elsewhere, or we believe you’re taking too much financial risk for what you’re trying to achieve. We’ll close with the opening statement, again: politics matter little to the LONG-TERM investor.
