Investing based on how you vote is still a terrible idea


Trump’s Election Shows How Much Investors Have to Learn
Investing based on how you vote is still a terrible idea.
Bloomberg, October 3, 2018

 

 

People, People, People must we go over this yet again?

I have gently chided you over the years not to allow politics to infect your investment portfolios. Obviously, this was to no avail based on a Bloomberg News article earlier this week with the headline “Republican Voters Bet on Stocks After Trump’s Win. Democrats Didn’t.”

I suppose I shouldn’t be surprised, since it’s clear that so much — no, too much — human behavior is based more on feeling than thinking. Still, color me disappointed.

The Bloomberg article focused on a study published by the National Bureau of Economic Research, laying out how political party affiliation affected household investment choices. After Donald Trump won the November 2016 presidential election, half the country was elated while the other half was depressed. That is expected in politics. But here is where things changed for the better or worse, depending upon how you voted. The research found:

“Republicans increase the exposure of their investments to the U.S. stock market relative to Democrats following the election. Democrats increase their relative holdings of bonds and cash-like securities.”1

You read that right: For no other reason other than the outcome of the presidential election, Republicans bought more stocks, while Democrats shifted to bonds and cash.

Even worse, this was not a one-time allocation shift. Instead, it was driven by “active trading over a six-month horizon following the election.” The study noted that the relative change in equity shares was “twice as large among previously active investors.” Not only was there an asset allocation shift, but these investors traded more actively for the two quarters after the election.

Again, I must ask why the outcome of any presidential contest should lead to a belief that the correct strategy was to increase one’s day trading.

Let us assume that perspective and sentiment were the key drivers, with different people holding very different worldviews — about the effects of tax cuts and deregulation, or a more muscular U.S. trade policy, or how well the domestic economy will respond to all of these inputs. Those different belief systems manifest themselves as different portfolio allocations.

To my Republican friends, I say, “Congrats. Good results for the wrong reason — you should just remember that you’re lucky, not smart.” To my Democratic friends, I say, “Come on. How could you? You missed out on some great gains out of partisan spite.”

This is not the first time we have referred to this phenomenon. As we noted in 2016, during both the George W. Bush (2003-07) and Barack Obama (2009-17) market rallies, partisan affiliation seemed to have affected investor performance for the worse. Those observations were based on anecdotes; the new NBER study now provides hard data that our intuition on the dangers of mixing politics and investing was on target.

I must point out the clever way the authors of this study used an interesting dataset to show how the election altered the behavior of people with opposing party affiliations. As they explain in the paper, they began with millions of households covering trillions of dollars in investable assets. They determined likely political affiliation by looking at Federal Election Commission reports of individual campaign contributions to party committees, campaign committees and political action committees during the 2015-2016 election season. The researchers used that information at the zip-code level to determine likely household party affiliation. Last, they overlaid changes in household investment portfolios against those affiliations.

Using very rough calculations, the authors concluded that the six-month period after the election saw a net decrease in demand for equity of about $3.3 billion. This is consistent with the 4 percent advantage the Democratic Party has over the Republican Party in terms of party affiliation.2



Source link

Leave a Reply