Leave Your Politics At The Door


The other day an old family friend, not a client, emailed asking a question about her portfolio and whether she should make changes due to her concerns about the president and her dislike for the current political environment. I had quite a few similar conversations with clients immediately after the election a year ago.

Part of my answer in all instances included the fact that I had just as many conversations back in late 2008 expressing concern over the outcome of that election. However many people were worried in 2016, there were just as many worried in 2008. One difference is that in late 2008 we had already taken defensive action in portfolios starting in late 2007.

What was important in 2008 was important in 2016 and is important now which is to stick to whatever investment process you chose as being best for you and sticking to it. As easy as that reads, it is very difficult to do. At these turning points, investors are confronted by greed, fear, FOMO (which is a form of greed I suppose) and any other emotions you want to throw in. Having emotions is fine, repeatedly succumbing to them is problematic.

I will say I don’t understand what the hell is going on politically. I am skeptical of all politicians and my view is that Obama broke a lot of things and that some how some way, Trump is making many things even worse. I blogged, tweeted, Facebooked up down and all around about what a catastrophe the ACA would be and the current administration seems hell bent on making it worse as just one example. I believe both parties to be completely broken and I don’t know how this gets fixed.

No matter how much you agree or disagree with any or all of the above paragraph, the stock market has continued to go higher with no signs of rolling over. One item I would add that will come up many times here is the idea that fast crashes like 2015, the flash crash, the Russian debt crisis, the Asian Contagion and even 1987 as that they were better to buy. The thing to act on are slow declines. Look at how slowly the market rolled over in March 2000 and then again in October 2007.

The equity markets are showing signs of deterioration in the form of fewer and fewer stocks like Facebook (FB), Amazon (AMZN) and so on accounting for a disproportionate part of the gains this year but that so called bad breadth doesn’t really help much with predicting when the market will turn.

The S&P 500 is up about 17% this year. Not to be taken as a prediction (will write about the folly of predictions another time) but the index could easily close out the year with a 20% gain. Depending on the time frame you look at, the average annual return for the stock market is 7, 8, 9 maybe 10% per year. That average takes in all the great years as well as the lousy years. If your financial plan relies on capturing stock market growth over some relatively long period then missing out on years like 2017 creates a big hole to dig out from, an unnecessary hole if it was created due to fear of an election outcome.

At some point the market will start to roll over slowly. When that happens, someone will be president and people from the opposing party will think/say I told you so and people from the incumbent party will blame the opposing party. None of that will matter from an investing standpoint. The arc is always the same. Bear markets start slowly, then they go down a lot and scare the hell out of a lot of people, then the market stops going down for no apparent reason and finally goes on to make a new high. The only variable is how long that all takes. After the tech wreck it took about seven years and after the financial crisis it took about six years.

If you don’t believe in that arc, which is a valid conclusion but not one that I draw, then you may not want to participate in equity markets any longer.