On the eve of the U.S. presidential election in 2016, Barry Ritholtz, chief investment officer of Ritholtz Wealth Management in New York, turned to his wife, a teacher, and said, "Honey, I don't think this is going to go the way you're expecting."
The same could have been said of a lot of his clients. As if on cue, "freaked out" e-mails started pouring into his in-box as election results trickled in.
Luckily, he was prepared for them. Mr. Ritholtz, too, had assumed Hillary Clinton would win that night. Yet when he'd written his monthly client letter earlier in the week, he'd left the final paragraph blank. Just in case.
The next morning he headed into the office to finish the draft. Yes, the election results were a surprise. But even if you thought Mr. Trump was "the worst thing ever, does that mean you turn around and trash your portfolio? What good does that do?"
When it comes to investing, it's nearly impossible to escape political noise – news headlines about Liberal government policy, cocktail chatter about the North American free-trade agreement, tweets blasted out by a certain floss-haired politician south of the border – but that doesn't mean you should allow it to cloud your judgment. Separating investments and politics goes a long way.
That's exactly the tack Paul Shelestowsky, senior wealth advisor with Meridian Credit Union in Niagara-on-the-Lake, Ont., takes with clients who fret about politics and itch to move their money into something "safer."
To calm them, he likes to pull out a chart that examines the long-term growth of stocks on the S&P 500 Index from 1929 to the present as it relates to geopolitics. The Spanish Civil War? It's there. Martin Luther King's assassination, the fall of the Berlin Wall and the World Trade Center attacks? They're listed, too.
"So many of them were not even a blip," he says, explaining the lack of any long-term impact on the economy and markets.
Then he lets the money do the talking to prove that buying and selling investments based on a knee-jerk reaction to headlines comes at a cost. For instance, money invested continuously since 1993 in the S&P 500 resulted in a 9.22-per-cent return. But missing the 10 most lucrative days over that same time period actually slashes the return in half, he explains. Miss the 60 best days and the numbers turn negative.
But how can anyone know when the best – or worst – 60 days will be?
"Exactly. You cannot time the markets," Mr. Shelestowsky says. "Even when Trump and Kim Jong-un are trading tweets, you see some ups and downs in the market because people are wondering, 'What's going to happen to oil?' But the long-term part of it is, if you stay the course, yeah, you're going to be fine."
People are notoriously bad at market timing, particularly if they're reacting to policy moves, says Glen Brown, head of investments for Manulife Private Wealth in Toronto.
Take Brexit, Britain's planned exit from the European Union. Back in June of 2016, when the vote results came in, Mr. Brown's team started fielding calls from clients asking whether they would be liquidating their positions in the United Kingdom. The answer was no; it was simply too early to tell what the outcome of leaving the EU would be.
Making a decision before the full picture is known is like "making a decision in a black hole," he says now.
The same can be said of recent NAFTA negotiations. Even if the U.S. pulls out of the agreement, Mr. Brown's portfolio managers still would refrain from reacting right away. "It will probably take a year or two after they say they're going to end it before we have a clean line of sight," he explains.
Other factors that could cause investors to make rash investment decisions are Canada's interest-rate hikes, real-estate concerns and increases in Ontario's minimum wage, he says. "None of these have actually proven to be an actual concern. They're hypothetical concerns because we still don't know what these outcomes are going to be."
The only investors who might want to pay a little more attention to government policy changes are those who no longer have a long time horizon on their side, says Tony Maiorino, head of RBC Wealth Management Services in Toronto.
"If you're retiring in the next year, you might be more sensitive to something a politician might be saying about a change in legislation in 12 months," he says.
Not all investment decisions based on politics are done out of fear, or even elation, for that matter. Sometimes tribalism trumps both. A University of Kansas study from 2017 tracked how U.S. mutual fund managers allocate assets, and it revealed they are more likely to choose firms managed by those they are in political agreement with.
Political bias also has an impact on how optimistic investors are about the stock market in general, according to another study. It revealed that when their preferred party is in power, investors see the markets as less overvalued and risky.
Today, investors can find exchange-traded funds (ETFs) linked to political leanings south of the border. Launched in October of 2017 by EventShares, the U.S. Tax Reform Fund (TAXR) tracks companies likely to be affected by tax-code reform. Think industrials and financials.
Also available are the actively managed Republican Policies Fund (GOP) and the Democratic Policies Fund (DEMS), which convert "noise from Washington, D.C. into Wall Street signals," according to marketing materials.