This is not the first time we have referred to this phenomenon. As we noted in 2016, during both the George W. Bush (2003-07) and Barack Obama (2009-17) market rallies, partisan affiliation seemed to have affected investor performance for the worse. Those observations were based on anecdotes; the new NBER study now provides hard data that our intuition on the dangers of mixing politics and investing was on target.
I must point out the clever way the authors of this study used an interesting dataset to show how the election altered the behavior of people with opposing party affiliations. As they explain in the paper, they began with millions of households covering trillions of dollars in investable assets. They determined likely political affiliation by looking Federal Election Commission reports of individual campaign contributions to party committees, campaign committees and political action committees during the 2015-2016 election season. The researchers used that information at the zip-code level to determine likely household party affiliation. Last, they overlaid changes in household investment portfolios against those affiliations.
Using very rough calculations, the authors concluded that the six-month period after the election saw a net decrease in demand for equity of about $3.3 billion. This is consistent with the 4 percent advantage the Democratic Party has over the Republican Party in terms of party affiliation.
It also implies that the total impact of the election was many times larger than that, since the study was confined to the investment accounts of one large but unidentified financial institution. If that 4 percent difference in affiliation is extrapolated, it suggests that about $80 billion in investment assets were changed due to the election outcome at this one firm. Given that the Standard & Poor’s 500 Index has a market capitalization of about $23.7 trillion, the impact on the overall market was negligible. But the effect on individual portfolios might have been significant — in terms of taking on more risk or less — and thus enhancing or reducing performance.
Regardless, this serves as yet another reminder to avoid investing based on emotions and that the range of reason so many of us use to make investment decisions are impulsive, irrational and often costly. You (and your children) will be grateful 50 years from now if you keep this in mind.
This column was provided by Bloomberg News.