MW Keep your political opinions away from your money

By Mark Hulbert

Even skilled stock-fund managers lose when politics and investing mix

You have to try especially hard these days not to let your political affiliation impact your portfolio. But it's worth the effort.

When the presidency is held by a member of your favored political party, you most likely will have great confidence in the economy's health and the stock market's outlook, and accordingly you will tend to have a high equity exposure level. Just the opposite is the case when your political party is not in the White House.

The difference is stark, as you can see from the chart above. Notice that prior to the November 2020 election, Republicans on average were far more optimistic about the U.S. economy than Democrats. This reversed dramatically after that election, and over the subsequent four years the Democrats consistently were more optimistic. After last November's election the pattern reversed itself yet again.

Recently the University of Michigan's Index of Consumer Sentiment among Republicans stood at 86.7, versus 51.3 among Democrats. It was the mirror opposite last October, the month before the election, when among Republicans the index stood at 53.6 and among Democrats it was 91.4.

The truth presumably is somewhere in the middle. I've made this point before when writing about political polarization's impact on our investment decisions, and my observations were widely misunderstood. So let me be clear. I'm not saying that different economic policies don't have differential impacts. Nor am I saying that the economy and the stock market will perform no differently under President Donald Trump than if his Democratic challenger Kalama Harris had won.

What I am saying is subtly different: If investors were objective rather than biased by our political polarization, there would be no average difference between the forecasts of Democrats and Republicans. In this world of political objectivity, there still would be wide disagreements about the likely impacts of different policies. But those differences would not be systematically related to political affiliation.

Engage with financial analysts and commentators from both political parties.

The investment antidote to political polarization is to engage with financial analysts and commentators from both political parties. Consider the results of research that Blair Vorsatz conducted for his 2022 Ph.D. dissertation at the University of Chicago. He found that equity mutual funds performed better, on average, to the extent their management teams included both Democrats and Republicans. Homogenous teams, regardless of party affiliation, performed more poorly on average.

The reason that the politically diverse teams performed better, on average, was that they were both ideologically and cognitively more flexible, according to Vorsatz. He had in mind "the absence of ideological preferences that constrain portfolio choice" and the ability "to adapt to novel or changing environments and to switch between modes of thinking."

So your goal should be to keep your economic and stock market forecast independent of your politics. The way to prevent that from happening is to get out of your echo chamber and engage with other investors and analysts of both political parties.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: How Trump can give Americans an economy that keeps on giving

Also read: Americans elected Trump to lower prices - his policies could do the opposite

-Mark Hulbert

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March 06, 2025 16:34 ET (21:34 GMT)

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