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And it’s important to remember that market returns are the result of many different factors. It’s difficult to establish a direct connection between the movements in stocks and the world of politics.
The challenge is that politics can lead even the most sophisticated investors to make rash, imprudent decisions. What can investors do to insulate their portfolio from their own inherent political biases? Here are four suggestions:
Stick to a philosophy of diversification. It’s tempting to invest a large percentage of your capital in one theme that you find compelling--for example, believing a candidate would improve a specific industry sector and choosing to invest heavily in those stocks should they win. But if those investments don’t perform as planned, the concentrated position can be devastating.
Set up a play-money account. Many advisers view small trading accounts as a waste of time and a surefire way for clients to lose their money. I’ve learned over time that these accounts actually serve an important psychological purpose; Investors can scratch their trading itch without blowing up their portfolio. In an election year, an investor can set aside a small portion of their investable assets (no more than 5%) to invest based on their political preferences. If things work out, great. If they don’t, the remaining 95% of their portfolio is still structured prudently.
Update your investment policy statement. An investment policy statement includes various information to help an investor reach their objectives, including parameters that clearly define their goals, time horizon and risk tolerance. It can also be customized for specific circumstances, with guardrails established to limit the potential impact of different scenarios. For example, if an investor thinks that a particular candidate will destroy the economy, they should indicate in their policy statement that only a limited percentage of their assets can be moved to cash should that candidate win. This allows them to act on their predictions, but also minimizes the downside risk.
Appoint your own investment committee. In the world of institutional money management, many organizations establish an investment committee for proper oversight of their investments. It’s an equally important concept for individual investors. Find unbiased, knowledgeable people, ideally outside your social circle to minimize groupthink, to bounce ideas off and challenge your investment thesis. The exercise of discussing your investments before executing them helps minimize emotional decisions based on your own political and personal biases.