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Presidents, Politics and Your Portfolio

It’s no surprise that this year’s U.S. presidential race has become a subject of conversation around the globe. In “Why Our Social Feeds Are Full of Politics,” Canadian digital marketing executive Tara Hunt observes, “American politics, it seems, makes for high-intensity emotions far and wide.” The intensity will probably only increase as the November 8 election date nears.

Politics and politicians regularly and directly affect many aspects of our lives and our pocketbooks. But as you think through this year’s contentious race, remember this:

The more heated the politics, the more important it is to establish and maintain a well-planned, long-term approach to managing your investments.

So go ahead and talk politics to your heart’s content – and be sure to vote! But when it comes to your investments, try to ignore any intense emotions and avoid the predictions that spring from them. Those thoughts can be dangerous distractions to your financial resolve!

Thinking in Stages
Have you ever heard of stage-one and stage-two thinking? They’re terms popularized by economist Thomas Sowell in his book, “Applied Economics: Thinking Beyond Stage One.” Basically, before acting on an event’s initial (stage one) anticipated results, Sowell suggests engaging in stage-two thinking, by first asking:

“And then what will happen?”

By asking this question again and again, you can more objectively consider what Sowell refers to as the “long-run repercussions to decisions and policies.”

Reflections on Presidential Elections
In investing, we see stage-one thinking in action whenever undisciplined dollars are flooding into hot holdings or fleeing immediately risky business. Stage-two thinking reminds us how often the relationship between an event and the world’s response to that event is anybody’s guess and nobody’s certain bet.

Stage-two thinking is especially handy when you consider the many predictions for anything from financial ruin to unprecedented prosperity that some may tie to election results. History shows that presidential politics won’t likely affect your portfolio much.

Again, the problem with the vast majority of these predictions is that they represent stage-one thinking. As financial author Larry Swedroe describes in a US News & World Report piece, “Stage one thinking occurs when something bad happens, you catastrophize and assume things will continue to get worse. … Stage two thinking can help you move beyond catastrophizing. … [so you can] consider why everything may not be as bad as it seems. Think about previous similar circumstances to disprove your catastrophic fears.”

In the current presidential race, we’re seeing prime examples of stage-one thinking by certain pundits who recommend that investors hoard cash until the voting results are in. At least one speculator has suggested that investors should move as much as 50 percent of their portfolio to cash!

And then what will happen?

Here are some stage-two thoughts to bear in mind:
• Regardless of the outcome of the election, there’s no telling whether the markets will move up, down or stay the same in response. By the time they do make their move, the good/bad news will already be priced in, too late to profit from or avoid.
• In the long run, the market has moved more upward, more often than it moves downward, and it often does so dramatically and when you least expect it.
• Moving to cash would generate trading costs and potentially enormous tax bills. Worse, it would run contrary to having a sensible plan, optimized to capture the market’s unpredictable returns when they occur, while minimizing the costs and manageable risks involved.

In this or any election, stage-two thinking should help you recognize the folly of trying to tie your investment hopes, dreams, fears and trading decisions to any presidential candidate. Politics matter – a lot – but not when it comes to second-guessing your well-planned portfolio.

As always, we welcome your questions and invite you to contact AMDG Financial if we can be of assistance.

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