Politics and Investment Decision Making

Over my 25-plus years as an investment advisor, I have seen many clients get worried or excited, depending upon who running, about an upcoming election.  Since 2024 is an election year, we at Sunpointe thought it prudent to revisit the importance of not letting politics influence your long-term investment decisions. In this article, I will review an academic article about politics and investment decision making, and then discuss data on investment returns based on which party is in power.

In 2017 Yosef Bonaparte, Alok Kumar, and Jeremy Page wrote an article called “Political Climate, Optimism, and Investment Decisions1.” Their paper demonstrated that investors’ optimism toward financial markets and the economy is influenced by their political beliefs and the existing political atmosphere.  The authors analyzed a large set of UBS/Gallup survey data, portfolio holdings, and trading data to determine if changing political expectations of U.S. households vis-à-vis financial markets and the macroeconomy affect their investment decisions. The following are two key findings:

  • Investors become more optimistic and take on more risk because they perceive the markets to be less risky and more undervalued when their preferred political party is in power.
  • When the less preferred party is in power, investors perceive increased levels of economic risk levels, and as a result behavioral biases manifest themselves which leads to poor investment decisions. The perception that economic uncertainty is high causes investors gravitate towards active management versus passive strategies and to trade more frequently.  The higher trading and higher management expenses led to lower investment returns.

The chart below shows that markets tend to perform well over the long-term regardless of which party controls the presidency and Congress.

Sources: First Trust, Morningstar, Bloomberg. Past performance is no guarantee of future results.

Summary

Based on the work by Bonaparte, Kumar, and Page, there is evidence that the political environment affects investors’ views of the economy and the stock market, and as a result impacts their investment behavior.  However, data show that markets tend to perform well over the long-term regardless of which party controls the presidency and Congress.

Our advice is to stick to your long-term allocations and not let politics influence investment decisions.  Please let us know if you have any questions or thoughts on this topic.

1 https://www.sciencedirect.com/science/article/abs/pii/S1386418117301155

 

Published Works

Over the past twenty years, Michael has written five books on behavioral finance and emotional investing to help clients make better investment decisions and reach their goals. His latest work below on the left is designed to help individuals recognize and better manage their behavioral investing biases in any stage of life or market environment.

Available on Amazon
Available on Amazon
Available on Amazon
Available on Amazon
Available on Amazon