By Jacobson Treux
We are about a year away from another presidential election and are already watching drama both across the aisle and within respective parties with a backdrop of increasingly tense geopolitics. Republicans recently appointed a new House Speaker after a 22-day stalemate, just in time to deal with a looming government shutdown.
In a world that seems more divisive each year, our clients are increasingly – and understandably so – emotionally agitated with the government. As a financial advisor, I help clients achieve their financial goals while trying to minimize risks. In pursuit of this mission, it is crucial to emphasize one fundamental principle to investing: politics should not influence portfolios.
While politics impact the economy and financial markets, allowing political biases to steer investment decisions often leads to disappoint-ing outcomes.
The investing world is complex, ever-changing and subject to countless variables and uncertainties. Investors face a constant stream of news and information and much of the headlines intertwine with politics. It is tempting to react emotionally to political events, especially when they seem poised to affect financial markets negatively; however, basing investment decisions on political sentiments can be a recipe for regret.
Of the many reasons why politics should be kept at arm’s length for your investment portfolio, here are a few of the main points one should consider.
Politics tends to evoke strong emotions and personal beliefs. Allowing these emotions to drive investment decisions can lead to impulsive and irrational choices. Emotional investing often results in buying at market peaks due to excessive optimism and selling in panic during downturns.
Focus on the long term
Political events tend to be short-lived. Successful investing requires a long-term perspective and the discipline to weather short-term fluctuations. When politics infiltrate investment decisions, it becomes harder to stay the course and adhere to a sound investment strategy.
Your investment decisions should align with your specific financial goals, risk tolerance and time horizon. Political considerations are typically irrelevant to these objectives. Focusing on your personal financial circumstances rather than political ideology or negative headline bias is the prudent path to long-term financial success.
Politics can be notoriously unpredictable. Even the most well-informed and seasoned pundits often get it wrong when predicting election outcomes or policy changes. Attempting to time the market based on political developments is akin to gambling with your hard-earned money. Especially in a world where disinformation looms large and negatively charged news creates more clicks and views.
Hit the history books
Throughout history, markets have faced and overcome various political challenges and uncertainties. The long-term trend of markets has been one of growth, despite periodic setbacks and regardless of which political party is in power. Staying invested for the long haul has historically been a winning strategy.
Diversification is key
This is a fundamental strategy for reducing risk in a portfolio. When political beliefs heavily influence investment choices, it can lead to an undiversified portfolio that is overly concentrated in specific sectors or assets. This lack of diversification can expose investors to significant risks if political fortunes change unexpectedly.
While politics undeniably impact financial markets and the economy, allowing political influences to dictate your investment decisions is generally ill-advised. A well-structured and diversified portfolio, aligned with your financial goals and risk tolerance, is the key to long-term success in investing.
As part of my role in helping my clients achieve success, I help guide my clients through the noise and emotions that often accompany political events. An election is only one of many influences – both positive and negative – that affect markets. Because there are so many variables, one cannot accurately predict the proportional impact.
I encourage clients to maintain a disciplined approach, focus on their long-term objectives and avoid making hasty decisions based on politics. By doing so, we believe investors can achieve greater financial stability and success in this ever-changing world.
The writer is a vice president and financial advisor at McLaughlin Ryder Investments.