Should Politics Play A Role In Our Investments? - Forbes

unitedstatepolitics.blogspot.com

With yesterday’s inauguration of Joe Biden, it seems the perfect time to consider the role that politics may play in our investments. Over the past weeks and months, politics has been a hot topic. Undoubtedly, we can expect the economy to change and the markets to react as policies and priorities shift. Many are worried about the outcome of the election—and many others are excited. So, with all of the different emotions at play, how do we think about politics as we make our investment decisions?

The Choice Facing Financial Advisors

As Commonwealth’s chief investment officer, I serve a wide range of advisors and clients. They all have political opinions, and I may fundamentally disagree with many of them (half?) on very important issues. How can I handle this disconnect?

As I see it, I have a choice. I can take public positions that might feel good but will both alienate and ill serve a substantial portion of my community, while convincing no one. Or, I can focus on communicating what I both know about and have been tasked to do, in order to help people, as investors, navigate the current turmoil.

All financial advisors face the same decision. For all of us, no matter what our opinions, stating them can make us less effective for a substantial portion of our clients. And we can't sidestep the issue by saying we have no opinions, because of course we do. What to do?

The way I have tried to deal with it is by explicitly separating the two roles I have: as a citizen (where I have very strong opinions) and as an economist and investment advisor (where all that matters is the data). By decoupling the two, I acknowledge I have my own opinions, but I try to make them less relevant to the discussions we are having.

I might say something like this. "As a citizen, I certainly have my own opinions, which may (or may not) be the same as yours. As your advisor, however, they don't matter. My job here is to help you navigate the uncertainty around these events in your investments, not in the rest of your life. Because of that, we can look at the economic and market facts, which is what I am here to do, and make a decision that is best for you. My only concern, sitting in this chair, is your financial future." I have used something like this with multiple client groups, on both sides, and it has been effective.

A Focus on Long-Term Outcomes

Another way to approach this is to demonstrate how it works in practice. In the last two elections, for example, I had people—on different sides—who wanted to sell out when Obama was elected and when Trump was elected. In both cases, it would have been a mistake. This example is a good follow-up, as you can directly look at emotional decisions, tie them back to the factual results, and make the point that as an investor, data is what is needed most. And that is the job of an advisor. However good or bad things are now, investors need to be focused on the long-term outcomes, not the short-term headlines. Taking the politics out can and does yield better long-term results.

Bumps in the Middle of the Road

This approach doesn’t always work, of course. I typically get feedback, some of it ferocious, whenever I write a piece that touches on politics, with my recent blog post on Washington turning a light shade of blue a good example. Several people felt very strongly, based on that post, that I must be a hard-core Republican. Others thought that the piece showed a clear Democratic basis and needed to be rewritten.

What I tried to do, though, was write something straight down the middle, presenting the facts and reasonable conclusions in a nonpartisan way. With this one, more than some of the others, I clearly failed in the eyes of some readers. That is inevitable, and the feedback helps me get better, so I appreciate it. I will try to do better. But I also draw comfort from the fact that I got fire from both sides. The middle of the road can be an uncomfortable place as well.

Recognize the Disconnect

What if you are not an advisor but just concerned about your own investments? The advice is the same. Look at the data. Don’t make emotional decisions. Realize the U.S. economy and markets are largely disconnected from politics. And keep an eye on the long term. No matter how you feel about either administration, investing is a game of decades during which we will have a wide range of politics.

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Should Politics Play A Role In Our Investments? - Forbes
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