An interesting study highlighted by the New York Times proves something we long suspected was true.
Republicans tend to be overly pessimistic about the economy when the Democrats are in power, while the Democrats tend to be similarly too Pessimistic when the republicans are.
Clearly pundits on both sides like to spin the economy in whichever way that discredits their opposition and supports their party.
For example, right now republicans have an incentive to make the economy look as bad as possible, in order to discredit the current administration. The Democrats had a similar incentive when Bush was around, especially ahead of the last election. The worst thing you can do is believe them. For example, many Republicans might have missed the 2009 rally as a result of this bias. Just as Democrats might have missed 2003.
Investors need to be ever-vigilant that they aren’t skewing their economic outlook due to underlying political beliefs. You may love or hate the guy in charge, but if this makes you too bullish or bearish, you’ll likely underperform your less politically-biased peers.
NYT: The researchers don’t take a position on whether these portfolio shifts, in and of themselves, are a good or a bad idea. Their point is that, regardless of the intrinsic merits of any of these shifts, individual attitudes toward them often change with the political climate. In other words, objectivity is rare.
The researchers did detect another pattern, however, that is classically self-destructive: Investors tend to trade more actively when their preferred party is out of power. In an interview, Professor Kumar speculated that this could be traced to reduced confidence about the stock market, which in turn causes investors to shun a buy-and-hold approach.
The researchers found that this more frequent trading resulted in inferior portfolio performance. Primarily for this reason, investors, on average, performed better when their political party was in power — about 2.7 per cent better a year.
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