Why You Should Drop Politics From Your Investment Portfolio

Here's our portfolio mix heading into the Presidential election's next stage

People tend to take their politics and religion seriously. That’s one of the reasons I try to avoid conversations in these topics because they often end in stalemates or “agree to disagree” type conclusions. Yet when the world of politics and investments collide, I am often asked about my opinion on how a particular candidate will affect the markets.

The 2016 presidential race is no different and we may even be experiencing a heightened sense of dread about the effects of an unforeseeable outcome nine months from now. The polarizing nature of this year’s Republican field is certainly one that the country is watching with fascination. It is also paving the way to a smorgasbord of opinions on how the market will react.

Tell me if any of these narratives sound familiar to you:

  • “The markets” (Wall Street) love Hillary Clinton.
  • Donald Trump would be bad (or good) for the health care sector.
  • Buy these XX defense stocks if a Republican makes it to the White House.
  • Democrats will run up the deficit.
  • Republicans will curtail the recovery.

The list goes on and on….

The closer that we get to election season, the more heated these arguments are going to become. You are going to hear a tremendous outcry for stocks, sectors, and asset classes that are “guaranteed” to do well (or crash) if a specific candidate wins. Hardcore political types will go so far as to move their portfolio to 100% cash, gold, or Treasuries if the other side takes office.

I can unleash a number of statistics showing the outcomes of differing political parties on the stock market over varying time frames. However, in my opinion, it doesn’t make a bit of difference either way.

The stock market is going to go up AND down no matter who is in office. There is no way to accurately forecast the exact timing that this will occur. It’s like trying to invest your portfolio based on the alignment of the planets or the weather. Volatility is not something that is new to the market or exclusive to any one party.

I remember back in 2008 when virtually everyone on Wall Street was terrified of the transition from George Bush to Barack Obama. The SPDR S&P 500 ETF (SPY) has experienced a gain of 186.59% since his inauguration on January 20, 2009. Seriously, look it up.

I’m not trying to advocate for Obama’s political policies or suggest that he was the driving factor in those returns. I’m simply pointing out that what you think will happen and what will actually happen are often very different things.

Everyone is entitled to their own opinion on how the markets will react to the next President of the United States. For many, that may include stocking up on guns, canned goods, and other assorted “end of the world” paraphernalia.

I only caution that becoming too overly committed to a single outcome in the market is a very dangerous position. If your thesis fails to pan out, it can have long-lasting detrimental effects on your returns and psyche.

In addition, I think that we are in a vastly different economic landscape than at any other point in history. The position of global stocks, interest rates, commodities, central bank policies, and other factors have combined to create a markedly different starting point for the next administration.

The Bottom Line Investment Advice

For myself and my clients, I am continuing to invest in a diversified mix of low-cost investments that are comingled to minimize volatility. The bulk of my portfolio is positioned in exchange-traded funds for core exposure and supplemented with tactical holdings in select mutual funds or closed-end funds that make sense in the current market climate.

As conditions change, I will be looking to reduce exposure to areas that show signs of distress and transition to new opportunities displaying emerging trends or favorable fundamentals.

One overriding theme in my strategy is to leave politics at the door. My focus is on navigating a steady course and achieving successful results no matter who takes office this year or any other year thereafter.

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