When Investing and Politics Don’t Mix
It is our nature to want to be able to predict what will happen in the future. This applies to many things in life. We struggle with the unknown and want someone to tell us what will occur next if we take a certain action or if some future event beyond our control comes to pass.
Recently, someone asked me how much they would earn if they went back to school and got an accounting degree. Someone with an accounting degree could work as a bookkeeper in a small family flower shop or become the chief financial officer of a large international company, with many other options in between. What you do with a degree in accounting, how hard you are willing to work and where you live will all factor into what you will earn. And what you earn upon graduating may not be what you earn 10 years later.
We desire certainty in the medical field, where it also simply doesn’t exist. Doctors prescribe drugs developed to treat a disease and we only find out later that they cause even worse problems for some people. Other times, a drug is developed to treat a certain disease and physicians come to find that it works even better against some unrelated illness. Say your parents lived into their 90s. Does that guarantee you will live that long as well? Your health may have some genetic components, but your life expectancy may be affected by diet, exercise and advances in medicine.
The recent presidential and congressional elections have caused emotions to run high for many voters and investors. The desire to be able to predict what will happen to investments based on election outcomes is normal, but not possible.
Investors may gain confidence if their candidate won or lose confidence if their candidate lost. They may then change their investment portfolios as a result of these emotions. But, movement in the stock markets may be driven by factors other than the elections and trying to correlate ups and downs in markets to a particular event is a mistake.
Too many factors, and the collective actions of millions of individual and institutional investors based on each of their specific needs, thoughts, judgement and programmed computer algorithms, affect the markets. You will not be able to outguess or outsmart the markets.
Economists are very busy running models to try and predict what will happen if taxes are cut and President Donald Trump’s proposals are put into place. However, proposals made on the campaign trail are often generalities and may or may not become law. You can line up as many economists who believe tax cuts will stimulate the economy and create jobs as you can doomsayers who will argue just the opposite. The point is no one can predict how things will play out in the future. Also, negative news can stir up fear, attracting increased attention among worried investors and thus helping financial media outlets sell more advertising.
Instead of worrying about things you cannot control, the best approach is to develop an investment plan based on your long-term goals. Your financial future will depend on how much you save and invest, how you control your spending, and how you structure your portfolio based on the risk you’re willing and able to take given your desired return. This is a long-term approach, and discipline and patience are required for any long-term plan to work.
While political predictions may or may not come true in the future, they should be set aside when it comes to making day-to-day investment decisions.
This commentary originally appeared February 4 on TheCasperStarTribune.com
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