Politics and Investing Don't Mix

I probably don't have to tell you that people have strong opinions about politics.

You probably have some yourself.

And that's perfectly fine. We live in a country where we're allowed to have different opinions about who should run the country, how much the government should spend, taxes, regulations, healthcare, energy policy, and just about everything else.

But there's one place where I don't think those opinions belong.

Your investment portfolio.

I've been doing this for more than 7 years now, and, in that time, I've watched investors make the same mistake over and over again.

They look at what's happening in Washington, get concerned about what it might mean for the economy, and decide they need to do something with their investments.

Maybe their candidate lost.

Maybe their candidate won.

Maybe the other party took control of Congress.

Maybe there's a new tax law coming.

Maybe there's a war, a tariff, a regulation, or some other political issue that they believe is going to be terrible for the economy.

And suddenly they're thinking, "I need to get out of the market."

Here's the problem.

The market doesn't care who you voted for!

And neither does your retirement plan.

Politics is personal

If you strongly believe that one political party is going to be good for the country and the other party is going to ruin it, it's pretty easy to assume the same thing will happen to your investments.

But investing doesn't work that way.

The economy is incredibly complicated. There are millions of businesses, consumers, workers and investors making decisions every day.

Interest rates matter.

Inflation matters.

Corporate earnings matter.

Productivity matters.

Technology matters.

Consumer spending matters.

Global economies matter.

And yes, government policy matters.

But trying to predict what all of those things will mean for the stock market based on who is sitting in the White House is a completely different proposition.

In fact, historical data doesn't give us much reason to believe that one political party is consistently better for investors than the other.

Vanguard, for example, looked at investment returns going all the way back to 1860 and found no statistically significant difference in the performance of a 60/40 portfolio during presidential election years versus non-election years.

That's not to say politics doesn't matter.

It absolutely does.

It just doesn't mean we can successfully invest based on it.

Here's where things get dangerous

The biggest problem with mixing politics and investing isn't necessarily that you're wrong about the political situation.

You might actually be right.

The problem is that being right about politics doesn't mean you'll be right about the market.

Let's say you believe a particular election result is going to be bad for the economy.

You decide to sell your stocks.

What happens next?

Maybe the market goes down.

You feel pretty smart.

But what if the market goes up instead?

Now you have a decision to make.

Do you admit you were wrong and buy back in?

Or do you wait?

And what happens if the market continues going up?

Eventually you start thinking, "I'll get back in when things settle down."

That's where this gets really expensive.

Because markets don't send you an invitation when it's time to come back.

I've seen this movie before

Over the years, I've had clients tell me some version of:

"I just don't feel comfortable being invested right now."

Usually there's a reason.

It's an election.

The president.

Congress.

The Fed.

A war.

Inflation.

The national debt.

An upcoming recession.

Something is happening that makes them believe the future is different this time.

And sometimes the future is different.

That's not the point.

The point is that we don't have to know exactly what happens next to build a successful retirement plan.

That's what a good financial plan is supposed to do.

It should account for the fact that bad things are going to happen.

Markets are going to fall.

Politicians are going to make decisions you don't like.

Interest rates are going to change.

The economy will go through recessions.

There will always be something to worry about.

That's not a flaw in the plan. That's the plan!

Your portfolio shouldn't be a political statement

One of the things I try to remind clients is that their investment portfolio has a job.

Its job isn't to agree with you.

Its job isn't to reward your political party.

Its job isn't to make you feel good about the person sitting in the Oval Office.

Its job is to help you accomplish what you want to accomplish with your money.

For someone approaching retirement, that might mean creating enough income to replace a paycheck.

It might mean making sure their spouse is taken care of.

It might mean having money available for healthcare.

It might mean leaving something to their children.

Those things don't change because of an election.

And that's why I think it's important to separate your political beliefs from your investment decisions.

You can be passionate about politics.

You can vote.

You can argue with your brother-in-law about it at Thanksgiving.

You can watch the news.

Just don't let your political opinions dictate what you do with your retirement money.

Because the truth is, we don't get paid for predicting which politician will be right.

We get paid for staying invested, managing risk and having a plan that can survive whatever comes next.

And there's going to be a lot of "whatever comes next."

There always is.