Investors Should Ignore Politics

Politics matters little to your investment outcomes.

This has been a theme of mine for nearly forever. I discuss this in presentations all the time.  It was — literally  — my first column for the Washington Post.

And yet the financial press simply cannot get enough of this stuff. They love a good narrative. While these story lines make for good copy, they also make for terrible investing advice.

Consider the market impact of the past Fiscal Cliff (none) and the Sequester (rally mode). Both of these events are relatively minor compared to past historical events of far greater import that also have had negligible impact on markets.

What has the overall effects been on investments of past historical events? Consider the attack on Pearl Harbor, which led the US to entering WW2; the Soviet Union’s launching of Sputnik into space, and starting the cold war arms race. (I can’t forget the Cuban Missile Crisis or the Iraq andAfghanistan Wars). There have been momentous events with U.S. presidents — the assassination of President John F. Kennedy, the resignation of President Nixon, the impeachment of President Clinton — none of which really impacted investment values much.

In none of the above, did the markets react unusually. At most they wobbled a bit, before resuming their prior trend. Even the horrific attacks of 9/11, which saw markets closed for almost a week, had a big selloff, followed by an even bigger snapback rally — followed by markets returning to the prior trend, which was the post-2000 popped tech bubble down slide.

The lesson investors should learn is while these events may transfix us emotionally, they have almost zero impact on corporate revenues, profits and valuations. They are what drive most of your investment results, aand not what is on C-Span . . .

This piece is cross-posted from The Big Picture with permission.

2 Responses to "Investors Should Ignore Politics"

  1. Yoav Tenembaum   March 13, 2013 at 4:14 am

    A fascinating article! I enjoy reading Barry Riholtz's articles very much. The question that emerges is whether such a conclusion applies only to the US or does the authour argue that it applies more widely to other stable, liberal-democratic countries as well? I assume he wouldn't contend that his thesis applies to emerging markets also…Would he?

    Yoav Tenembaum (Tel Aviv University)

  2. kierz   March 20, 2013 at 2:24 am

    Broadly regarding politics…yes, Mr Ritzholtz you are very correct, but broadly the power of the media to pump and dump is unparalleled….dot com bubbles….cold war bubbles….commodity bubbles….shale gas bubbles….on and on.