Politics is important, but if you focus your long-run investment decisions on a multitude of other factors, you should see better returns over time

We’d say most successful investors should avoid basing long-run investment decisions on any single factor, even something as important as the actions of the U.S. President. Yet it seems this is happening more than ever, due to the polarization of U.S. politics in the past couple of decades.

The major Canadian and U.S. stock market indexes could drop from today’s record highs, yet you have to live with that kind of volatility if you hope to succeed as an investor. It’s also possible that the market could stabilize, then surprise a lot of people by shooting up further, rather than falling.

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One of the top-selling golf books on Amazon right now is something called “Commander in Cheat: How Golf Explains Trump.” The title alone tells you all you need to know about the author’s politics, and that’s a sign of the times.

The title makes me think of a joke from the 1990’s about a curious golf practice, called “taking a mulligan.”  In the late 1990’s, I played golf once or twice a week. Back then, when the topic of mulligans (a second chance at a swing) came up, somebody would say, “I don’t mind a mulligan or two, but I really look down on golfers who take ‘clintons.’”

If this drew a quizzical look, the golfer would explain, “That’s the Bill Clinton version of a mulligan. It’s when you flub your tee shot, hit your second shot into the trees, take three shots to get back on the fairway, finish with a two-putt, then tell the scorekeeper to put you down for a bogie.” (For non-golfers, this adds up to lying about almost every shot, rather than merely taking a liberty with the first one.)

It’s one thing to let your political views colour your tastes in golf humour. But most successful investors don’t let politics influence their long-run investment decisions.

Take time to understand past U.S. presidencies so you can make money with your long-run investment decisions

An investor recently sent me a copy of a research study that compared the performance of the stock market under U.S. presidents since the Second World War, starting with Democrat Harry Truman (President from 1949 through 1953, 69.3% total return in his 4-year term). The study aimed to see if the market performs better under a Republican or Democratic President.

I then came across a similar study that went back to Republican Herbert Hoover (President 1929 through 1933; 77.09% total loss in his 4-year term).

The average total return during terms under a Republican president was 16.61% (1.71% yearly); under a Democratic president, the average gain was 57.44% for each 4-year term (10.83% yearly).

However, statisticians say there is no clear advantage under presidents from either party. That’s because of the large random skew in total returns during past 4-year presidential terms. For one thing, Democratic presidents happened to spend their first term in office during the three most profitable 4-year terms: Franklin D. Roosevelt’s first term (1933-1937—total return of 205.48%); William J. Clinton first term (1993-1997—total return of 97.85%); Barack Obama’s first term (2009-2013—total return of 90.7%).

Even if both parties were absolutely consistent in their politics for decades, it would still be foolish to overlook the varied events that take place outside the White House in every term, largely out of the President’s control: Wars, economic booms and recessions, changes in international monetary conditions, changes in commodity prices and availability, and on and on.

The funny thing is that some investors do sometimes base huge investment decisions on the results of a Presidential election. These investment decisions may work out well or badly, due to the large random element involved. This is just as true today under the administration of President Trump.

Don’t let changing conditions during a presidential term dominate your investing

A U.S. election year stock market tends to go on an above-average rise.

Additionally, U.S. presidents tend to get a lot friendlier toward business and investors in the second half of each four-year U.S. Presidential term. Stocks usually (but not always) rise in response.

Presidents naturally want to win election for themselves, or their preferred successor. They also want to bolster the prospects of their political party. To do that, they have to win favour with voters. It’s especially crucial for them to charm investors into buying stocks in the second half of the Presidential term.

Rising stock prices help fuel greater consumer spending, which spurs the economy to faster growth. Rising stocks also spur capital spending and hiring, which creates jobs. That’s why a rising stock market tends to make everybody happy.

would still be foolish to overlook the varied events that take place outside the White House in every term, largely out of the President’s control: Wars, economic booms and recessions, changes in international monetary conditions, changes in commodity prices and availability, and on and on.

The funny thing is that some investors do sometimes base huge investment decisions on the results of a Presidential election. These investment decisions may work out well or badly, due to the large random element involved. This is just as true today under the administration of President Trump.

Don’t let changing conditions during a presidential term dominate your investing

A U.S. election year stock market tends to go on an above-average rise.

Additionally, U.S. presidents tend to get a lot friendlier toward business and investors in the second half of each four-year U.S. Presidential term. Stocks usually (but not always) rise in response.

Presidents naturally want to win election for themselves, or their preferred successor. They also want to bolster the prospects of their political party. To do that, they have to win favour with voters. It’s especially crucial for them to charm investors into buying stocks in the second half of the Presidential term.

Rising stock prices help fuel greater consumer spending, which spurs the economy to faster growth. Rising stocks also spur capital spending and hiring, which creates jobs. That’s why a rising stock market tends to make everybody happy.

Use our three-part Successful Investor approach to make smart long-run investment decisions

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Has the Trump presidency been beneficial or detrimental to your stock investing career?

How much do you think the stock market changes based on who the U.S. president is?