Does the outcomes of federal elections change your investment outlook and strategy? Perhaps in ways you are not aware! There are all kinds of things that affect investment decisions, many of them working below the level of consciousness.
Mark Hulbert frequently gives out interesting tidbits in his weekly Sunday column in the New York Times Business Section. His January 31rst (2010) column reports on some interesting research on investing and politics.
It turns out that investors become much more optimistic about the economy and the domestic equities market when their preferred political party takes power in Washington. The research is based on data from 1991 to 2002. The analysis makes use of some creative but imprecise measures – measures which are perhaps too loose for some. Still, I find the results at least suggestive if not conclusive, perhaps because they align with my own observations about how investors react. Mr. Hulbert writes:
“When an investor’s favored political party held power in Washington, he or she generally increased holdings of risky stocks, shifted from foreign to domestic companies and traded less often. The opposite occurred when the preferred party was out of office.”
When you think about it, these results are not too surprising. Perhaps the most important finding in the study is that the more educated and more experienced investors are less likely to dramatically reallocate their portfolio when power changes hands in Washington. They are less likely to be swayed by their emotions.