
In today’s ever-changing political landscape, law firm owners often wonder if they should adjust their investments based on who wins an election. It’s a common concern, but one that could cost you dearly in the long run.
The Real Cost of Politically-Driven Investing
If you’ve been moving your money in and out of the market based on who’s sitting in the White House, you’ve been making one of the worst financial mistakes possible. Darren shares a staggering statistic: if you had only invested during Republican presidencies since 1953, your $10,000 would be $83,000 today. The same scenario for Democratic presidencies would yield $254,000. However, if you had ignored politics altogether and stayed invested from 1953 to today, your $10,000 would be worth over $2.1 million. That’s a tenfold difference! This emphasizes the importance of a long-term, politics-agnostic investment strategy.
Why Do We Let Politics Dictate Our Financial Decisions?
It’s surprisingly common for investors to let political bias influence their financial strategies. Much of this stems from our emotions and need for control. Even seasoned investors, like hedge fund managers, sometimes fall prey to this. But as business owners, especially law firm owners, it’s crucial to separate our emotions from our financial decisions.
What Drives Market Performance?
Market fundamentals like corporate earnings, interest rates, and global economic trends drive stock prices more than political decisions. Even the policies that politicians promise during their campaigns often take years to come into effect, if they materialize at all, due to the system of checks and balances in government.
Investing Through Historical Political Events
Let’s take a look at the 2016 election. Despite widespread fear that Trump’s election would lead to market volatility, the S&P 500 gained over 20% in his first year. Similarly, there was fear that Biden’s win in 2020 would tank the market, yet the S&P 500 gained over 16% in his first year. These examples show that political outcomes don’t always align with market expectations.
Core Investment Strategies That Always Work
- Diversification: Make sure your investments are spread out among different asset classes. The bulk of your portfolio should mirror the S&P 500, with satellite investments as additions.
- Long-Term Focus: Look beyond the next year and focus on where your investments will be 30 or 40 years from now. This mindset helps you see past short-term political shifts.
- Rebalance, Don’t React: Instead of reacting to political events, rebalance your investment portfolio to make sure it aligns with your target asset allocations. This disciplined approach helps you stay on course.
Avoiding Bias and Emotional Decisions
Be aware of psychological biases like confirmation bias and recency bias. These biases can lead you to make emotionally driven investment decisions rather than ones based on facts. Understanding these biases helps you avoid poor financial decisions driven by political events.
What’s Your Next Step?
If you’re concerned about how politics might affect your portfolio, take a deep breath and refocus on your long-term goals. Resist the urge to make sudden moves based on political headlines. Remember, building wealth is about having a strategy that works no matter who is in power.
Resources
- Book a Call with Darren
- Wurz Financial Services
- The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence by Darren Wurz
- LinkedIn: Darren P. Wurz
- Investing based on politics is a bad idea for your portfolio
Transcript:
Darren Wurz [00:00:00]:
Are you letting politics control your portfolio? It’s time to stop. Welcome to the Lawyer Millionaire, where we deliver financial planning insights for ambitious law firm owners so you can enjoy more time, more abundance and less stress. Even if you’re still growing your practice as election season ramps up, you might be wondering if you should adjust your investments based on who wins or who you think might win. It’s a common concern, but one that could cost you dearly in the long run. Today, we’re going to break down why investing based on politics is a bad idea and how you can protect your financial future from the short term political noise.
Intro [00:00:45]:
We are on a mission to help lawyers and law firm owners maximize wealth and achieve financial independence. Welcome to the lawyer millionaire with Darren Wurz from Wurz Financial Services.
Darren Wurz [00:00:59]:
Here’s the hard truth, friends. If you’ve been moving your money in and out of the market based on who’s sitting in the White House, you’ve been making one of the worst financial mistakes possible. Hey, law firm owners, welcome to today’s episode. I’m so glad that you’re here with me. Today we’re going to talk about why investing based on politics is a bad idea. So let’s dive in. Did you know that if you had only invested during republican presidencies since 1953, your $10,000, let’s say you put $10,000 in 1953. You know, only during those segments where Republicans controlled the White House, your $10,000 today would be $83,000.
Darren Wurz [00:01:38]:
Now, if you’d gone and done the same thing, but only for democratic presidencies since 1953, it would have grown to $254,000. Now, before you start thinking that we should be investing during democratic presidencies and not republican presidencies, let me just tell you, if you had ignored politics altogether and stayed invested from 1953 to today, your $10,000 would be worth over $2.1 million. Million dollars. Let that sink in for a minute. That’s a huge difference. That’s a tenfold difference. I mean, that’s just bizarrely incredible. There have been some very, very different presidencies over the years.
Darren Wurz [00:02:26]:
So why are so many investors letting politics dictate their financial strategy? And this might seem like it’s duh, right? But you’d be surprised by the number of people that I talk with who have this idea that, oh, my gosh, if someone gets into the White House, you know, I’m pulling all my money out of the market. I talk to these people who have this, you know, these thoughts all the time. So this is actually a lot more common than you might think. But why do people let this distract them, even when we know empirically that chasing this kind of a strategy is a losing idea? Well, a lot of it has to do with our emotions. It’s easy to let our emotions get in the way. In fact, I think in the news there was some big hedge fund guy who was threatening he’s going to pull billions of dollars out of the stock market. I think I forget who he was against. I think maybe it was Harris.
Darren Wurz [00:03:26]:
If Harris gets into the presidency, he says he’s going to pull billions of dollars out of the stock market. Well, so, you know, clearly this kind of stuff impacts even sophisticated investors who are wealthy. Right. This is not just something that us smaller peons are affected by, but it really all comes down to our emotions and to our sense of control. You know, as business owners, we often thrive control. We want to believe that we can anticipate every market shift and protect our assets accordingly. And I find this is especially common among law firm owners who kind of manage their own investments. They think they can know and anticipate what’s going to happen.
Darren Wurz [00:04:10]:
You know, oftentimes that’s a myth. And so many people have been tricked, deceived into thinking that they can outsmart the market, and the market has outsmarted them. Friends, the stock market responds more to earnings valuations and global economic trends than to whoever is sitting in the oval office. That’s the hard reality. You know, there are so many more things that are so much more valuable. In fact, many of the policies that we think will impact the economy take years to play out, or they get stuck in political gridlock. I mean, politicians promise all these great, wonderful things. The truth is, they really only can accomplish a very small amount of the things that they promise because we have checks and balances in government.
Darren Wurz [00:05:03]:
So as business owners, we need to separate our emotions from our financial decisions. That’s number one. And we need to let go of this idea that we can really control or outsmart the market. Let’s dive a little bit deeper into why political decisions don’t drive performance. You know, politicians make promises, but our government system of checks and balances often means that these promises, either one, never happen or two, take a long time to come into effect. You know, even executive orders can be challenged in court and overturned. So it’s not like presidents have free reign to do whatever they want. Meanwhile, market fundamentals, things like corporate earnings, interest rates, these are the things that really drive stock prices.
Darren Wurz [00:05:55]:
And there is a huge, wide range of factors that affect the stock market’s movements, which are completely separate from the political landscape. Let’s look at an example. 2016 election. That was a very contentious election. You know, and by the way, it seems like, why do I. Why are we having this conversation, right? I mean, it feels like this should be a known fact, but, you know, it just seems like every election, things get more and more bizarre and crazy and contentious. But, you know, 2016 was a contentious election for sure. Right? You had Trump and you had Clinton going at it, and there was widespread fear, you know, on both sides, really.
Darren Wurz [00:06:36]:
But there was a lot of fear that if Trump was elected, there would cause there would be all this market volatility. Well, he won, and the S and P 500 gained over 20% in the first year after his election. Likewise, many fear that Biden’s win, if he won in 2020, the market would tank. The reality, the S and P 500 gained over 16% in his first year. So those are just two very small examples where there was fear that there would be a market panic if one president was elected. Here’s the interesting thing. For every person who feels like one candidate is going to tank the market, there’s another person who feels the exact opposite. You have people over here who feel like if this happens, the market’s going to tank, and people over here who feel like if the opposite happens, the market’s going to tank, and then no one ends up being right.
Darren Wurz [00:07:31]:
Usually. But these examples should illustrate that political outcomes don’t always align with market expectations. And making investment decisions based on fear or hope in an election can really, really cost you. Let’s talk about some ways that you can kind of get away from this idea and give yourself some more balance. Number one, core ideas that have always worked. I have said this as an avid weightlifter, I go to gyms and I see all the time, I see people doing crazy things. The reality is, the basics have always worked. When it comes to exercise and eating healthy, the basics work.
Darren Wurz [00:08:17]:
The basic fundamentals of weightlifting. I think Arnold Schwarzenegger talked about that. The same thing applies to investing. The basics work. The basic, time tested core principles work. Now you can do extra things, right? You know, stock picking. You see a stock you really believe in, you want to add it to your portfolio, great. But the core principles should make up the core of your portfolio.
Darren Wurz [00:08:42]:
That should always be the case. Number one is diversification. Such an overused term, but so critical. Make sure your investments are spread out among different asset classes. The bulk of your portfolio should be, the market should be the s and P 500, and then you could have satellite investments that are stacked on top of that. But the foundation, you have to have the foundation. And having that foundation and having proper diversification is going to protect you from political volatility and short term events. Second thing, and we hear this all the time, but it is worth repeating, the long term focus.
Darren Wurz [00:09:20]:
And, you know, we hear these words, but we don’t think about what they mean. Long term focus doesn’t mean I’m concerned about looking to next year, looking twelve months out. No, long term focus means I am 35. I’m focused on what things are going to look like when I’m 65. Ah, okay. That’s a big difference. That’s a big zoom out, right? Zoom. Zoom way out for a minute and, you know, then it’s like, okay, well, what happens in November really doesn’t matter because I’m thinking about the year 2074 or 64.
Darren Wurz [00:09:57]:
Maybe 74 might be a little long, you know, 54. Right. I’m focused way out from here. I’m focused, you know, decades away. Now, if you’re closer to retirement, you know, you may not have such a long term focus. There’s the retirement red zone, we call it, which is those five years just before and five years just after retirement. Those are the most critical years where volatility in your portfolio can have the biggest impact. We call that sequence of returns risk.
Darren Wurz [00:10:27]:
Yes, but you didn’t know we were so savvy about investments. We talk a lot about law firms and growth and business strategy, but the core of our business is at the end of the day, we started out as investment strategists, so that’s when you need to protect yourself from portfolio volatility. But there are better ways to do that than pulling your money out of the market or panicking because some political outcome that you’re concerned about. Remember, your investments should be aligned with your long term goals, not short term political shifts. And we have seen some huge examples of this over the last five years when there have been these panics. If you had pulled your money out of the market during any of these panics that we’ve had, you lost big time and then struggled to know when to get back in. That is not the name of the game. Markets go up and down.
Darren Wurz [00:11:21]:
Staying invested is really the key. A third principle for you, rebalance, don’t react. That is the one action that you could take if you have a portfolio allocation that your portfolio should be sticking to. If you’re concerned about what may happen. Rebalance. Bring your portfolio back into line with the targets that you’ve set for your different asset classes. That’s the one action that you can take and let that give you some confidence you’re in. You’re aligned, you’re following your strategy.
Darren Wurz [00:12:00]:
Instead of making sudden moves based on political events, stick to your disciplined approach. This is easier said than done because disciplined approach means I’m not going to touch my portfolio for the next four or five years. That could be hard to do. I see investors all the time who are, you know, change their strategy a couple times a year and they’re never successful and they never make money. That’s the reality. If you’re always changing your strategy, you’re never going to be successful with investing. You’ve got to stick to a plan and stick to it long term. So rebalancing your portfolio simply means bringing it back in line with your target allocations and ensures that you stay on track and you’re not letting your emotions get the best of you.
Darren Wurz [00:12:42]:
A couple examples I want to look at historically of moments where events caused fear, but the market ultimately rewarded the people who stayed invested. The post 911 recovery. After September 11, the market saw a very sharp decline. A lot of people panicked. A lot of people pulled their money out of the market. What’s happening? The sky’s falling. The world’s ending. People who stayed invested saw a very strong recovery years later.
Darren Wurz [00:13:12]:
It took some time, but when the market rebounded over the next few years, they made a lot of money. 2008 financial crisis, that was another time we thought the world was ending. Yeah, look at the chart of the S and P 500. Go back to 2008. It’s a tiny blip now. It was a huge event. Market went down 50%. Many feared that drastic.
Darren Wurz [00:13:34]:
That was a time of political turmoil too, by the way, because at the very bottom of the market was when President Obama was taking over from Bush and a lot of people were terrified that the world was going to end, that he’s going to harm the market. Well, actually, that was the moment to get invested because that’s when the market actually started to recover again. There’s nothing to do with politics, it’s just the way events unfolded. Actually, the people who stayed invested saw a huge bull market run over the next, over the next two terms. Really? Another example, of course, would be when President Biden took office, there was widespread fear about inflation, which has been calming down. I know prices are still high, and just because inflation is calming down doesn’t mean prices are calming down. But 2022, we saw a bear market. With the stock market, we did see a bear market.
Darren Wurz [00:14:42]:
There’s a lot of concern about inflation, and there was a lot of concern about market volatility due to spending the infrastructure bill and things like that. Market shrugged that off, and look where it is today. Now watch. I’m going to eat my words. A year from now, we’re going to be in a bear market. Who knows? But the market historically has just always gone higher over time. Sure, there’s volatility along the way, but things keep moving up. There’s some psychology behind why and how we allow political bias to affect us.
Darren Wurz [00:15:20]:
A couple of good ones. We like to talk about confirmation bias. Confirmation bias is something we see in investing. It’s something we definitely see in politics. Confirmation bias is where you seek out information that confirms your bias. And this is what Facebook and social media does to us, because the algorithms feed us the stuff we like to see. So if you have one particular political persuasion, you’re going to see stuff that’s going to lead you further and further in that direction. One reason I kind of avoid social media, you know, in terms of politics, completely.
Darren Wurz [00:15:56]:
I just watch the funny videos, or the videos about law firms that are, I find interesting and engaging. But this happens with investors, maybe, who are seeking out information that aligns with their political beliefs, and then they start to believe that more and more. And then that leads them to make investment decisions based on emotions rather than facts, because they’re not taking an objective view. This is especially common during election seasons because there’s so much happening in the media and there’s so much, it’s like all of our collective emotions are just ramped up. Right. And so we’re especially prone to this during these time periods. Another one is the recency bias. The recency bias is where you place more weight on recent information than all the information.
Darren Wurz [00:16:46]:
What happens here is when investors often place too much weight on recent events, assuming the current political environment will have long lasting impacts on their portfolios. However, markets have a way of rebounding. This happens when markets are falling. We see the recency bias. Markets are falling. They’re always going to be falling. Oh, my gosh. Right? And then finally, just fear and greed.
Darren Wurz [00:17:08]:
As I mentioned, politics just. They stir up emotions. Politics stirs up emotions. And when the party we don’t support is in power, we fear the worst. But you got to realize that there are other people on the other side who fear a completely opposite thing. You know what I mean? And vice versa. When the party we support wins, we may be overconfident, and that can lead us to make bad investment decisions. Both emotions can lead to poor decisions, either overconfidence or irrational fear.
Darren Wurz [00:17:40]:
If we understand these biases and our human nature, our human tendency to have these biases, we can avoid making bad decisions. So what’s your next step? If you’re concerned about how politics might affect your portfolio, take a deep breath. Refocus on your long term goals. Don’t let the headlines dictate your financial future. And here’s my challenge to you. The next time the political headlines make you anxious about your investments, resist the urge to react. Remember, it’s not politics that builds wealth. It’s patience, discipline, staying the course.
Darren Wurz [00:18:19]:
Ask Warren Buffett. Don’t let short term political drama distract you from your long term financial goals. At the end of the day, building wealth is about having a strategy that works no matter who’s in power. And as a law firm owner, your portfolio should be working as hard for you as you are for your clients. If you need help creating a rock solid investment strategy that’s built for the long term, we are here to guide you. I’ve got two things for you. You can download our PDF or I’m going to put that in the show notes on why investing based in politics is a bad idea. Put that in there for you.
Darren Wurz [00:18:54]:
There’s a great chart there to show that. And if you want help designing an optimized investment strategy to reach your financial goals, schedule an introductory call with me. I’ll put the link in the show notes below. This has been the lawyer millionaire podcast. I’m your host, Darren Wurz. Thank you so much for joining me on this journey to expand your business, maximize your profits, and secure your financial future. I can’t wait to connect with you again next time. Until then, take care and keep pushing forward.
Outro [00:19:29]:
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