Politics vs. Profits: Why Your Portfolio Should Ignore the Headlines (Ep. 84)
In today's ever-changing political landscape, law firm owners often wonder if they should adjust their investments based on who wins an election. It's a common concern, but one that could cost you dearly in the long run.
The Real Cost of Politically-Driven Investing
If you've been moving your money in and out of the market based on who's sitting in the White House, you've been making one of the worst financial mistakes possible. Darren shares a staggering statistic: if you had only invested during Republican presidencies since 1953, your $10,000 would be $83,000 today. The same scenario for Democratic presidencies would yield $254,000. However, if you had ignored politics altogether and stayed invested from 1953 to today, your $10,000 would be worth over $2.1 million. That's a tenfold difference! This emphasizes the importance of a long-term, politics-agnostic investment strategy.
Why Do We Let Politics Dictate Our Financial Decisions?
It's surprisingly common for investors to let political bias influence their financial strategies. Much of this stems from our emotions and need for control. Even seasoned investors, like hedge fund managers, sometimes fall prey to this. But as business owners, especially law firm owners, it's crucial to separate our emotions from our financial decisions.
What Drives Market Performance?
Market fundamentals like corporate earnings, interest rates, and global economic trends drive stock prices more than political decisions. Even the policies that politicians promise during their campaigns often take years to come into effect, if they materialize at all, due to the system of checks and balances in government.
Investing Through Historical Political Events
Let's take a look at the 2016 election. Despite widespread fear that Trump's election would lead to market volatility, the S&P 500 gained over 20% in his first year. Similarly, there was fear that Biden's win in 2020 would tank the market, yet the S&P 500 gained over 16% in his first year. These examples show that political outcomes don't always align with market expectations.
Core Investment Strategies That Always Work
Diversification: Make sure your investments are spread out among different asset classes. The bulk of your portfolio should mirror the S&P 500, with satellite investments as additions.
Long-Term Focus: Look beyond the next year and focus on where your investments will be 30 or 40 years from now. This mindset helps you see past short-term political shifts.
Rebalance, Don't React: Instead of reacting to political events, rebalance your investment portfolio to make sure it aligns with your target asset allocations. This disciplined approach helps you stay on course.
Avoiding Bias and Emotional Decisions
Be aware of psychological biases like confirmation bias and recency bias. These biases can lead you to make emotionally driven investment decisions rather than ones based on facts. Understanding these biases helps you avoid poor financial decisions driven by political events.
What's Your Next Step?
If you're concerned about how politics might affect your portfolio, take a deep breath and refocus on your long-term goals. Resist the urge to make sudden moves based on political headlines. Remember, building wealth is about having a strategy that works no matter who is in power.
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