These are times that test investors’ souls. The US, the most important economy in the world and home to its largest markets, is a few weeks away from an election that will have major repercussions for economic policy and, in a worst-case scenario, implications for global political stability, as well.
Stocks, bonds, real estate — every asset, in every region, feels like it is sitting on the tracks, with a train coming around the bend.
So it is crucial that individual investors rise to this moment of challenge. By doing nothing.
For this is not a test of foresight or investing skill. It is a test of discipline. For the individual investor, the risks involved in trying to outthink the market, while at the same time controlling the emotional responses that arise at moments such as these, far outweigh the potential gains from positioning for one or another imagined outcome.
It is easy to see why investors might feel the impulse to act. Consider policy. The most direct way the Trump presidency has touched investors’ portfolios is through his tax cut for corporations, which brought the statutory rate down from 35 to 21 per cent of profits. This had a nearly immediate positive effect on companies’ net profits, supporting dividends, share buybacks, and share prices.
Joe Biden has promised that he will partially reverse Trump’s cut, bringing the rate up to 28 per cent. If the Democrats take back the Senate and hold the house, there is every reason to think this will happen (now, the betting market sees a slightly better than 60 per cent chance that Mr Biden wins, while pollsters see a better than even chance that the Senate turns Blue). And if it does happen, all else equal, cash profit at US companies will fall — and stock prices are likely to follow.
So why not lighten up on US stocks? The logic seems solid enough. On the other side of the coin, Mr Biden’s clean energy plan includes $2tn in investments in clean energy infrastructure in the coming years. Why not get in front of that spending by increasing your allocation to the solar industry?
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Even without taking a view on who will win, it is tempting to act. The president has said he might not accept the results of the election, which he has declared in advance to be rigged. If the vote is close on November 3, we may not know who is president for some time; the constitution specifies only that the next president is sworn in by January 20. Even if the streets remain calm during those six weeks, the government will be paralysed. Progress towards a badly needed further round of fiscal stimulus will stall. It could be, in short, a mess. Why not reduce exposure to risk assets and wait for the smoke to clear?
The best reason to resist the sirens of do-somethingism is that politics makes you stupid. We are all emotionally engaged in it and emotions cloud our judgment. A poignant example: in the week after Mr Trump’s victory in 2016, the percentage of Republicans who thought the US economy was on a positive trajectory went from 16 to 49 per cent. Over the same week, Democrats’ views of the economy crashed (although by less). Not only does this shift demonstrate a fantastical view of presidential control of the economy. The partisan split shows how much our views of hard facts can be bent to conform with political preferences.
Politics destroys objectivity. Investing requires it. So election season is a terrible time to decide you can outsmart the armies of professional investors and supercomputers that are assessing the odds of a contested vote or the impact of a Biden presidency on solar-panel makers. When the smoke clears, you may discover you sold (or bought) at the worst possible time. Your regret will only increase the likelihood of making another mistake.
Instead, stick to your plan. Set an asset allocation that matches your risk appetite. Rebalance periodically to keep it in line. Make sure you assess your portfolio in home-currency terms, if you are based outside the US, and especially if you live in the UK, with the Brexit-exposed pound being so volatile. Keep your eye on your real time horizon, not the election cycle.
Should the impulse to act become overwhelming, here is a prescription — at least for those in countries where betting is legal. Take a week’s salary and bet it all on the outcome that, in your estimation, the bookmakers have mispriced. If you hesitate before putting the money down, then you have no business fiddling with your portfolio, either. And if you do have the guts to make the bet, you will at least know that you are gambling.
Robert Armstrong is the FT’s US financial editor