Fiddling as Your Wealth Burns

Get a load of these results of a recent survey of 1,000 investors by investment firm Edward Jones: 90% of Americans plan to make changes to their savings and investment strategies over the next six months. Why? The presidential election is the most-cited reason. Just 5% plan on staying the course over the next six months.

You know this is going to end badly.

Yes, the survey results are suspiciously askew. Surveys can be flawed. And some investors may say one thing but do another. But it's worth asking how changing investing strategies because of a presidential election has worked in the past.

We have plenty of examples.

During the 1996 election, market commentators recommended following a time-tested trend. "Investors would be wise to adjust their portfolios, depending on who wins the presidency in November," The News Tribune wrote that year. It continued:

Studies have shown that small stocks usually fare better under Democratic administrations and bigger stocks fare better under the Republicans. Research by Tacoma's Frank Russell Co. and Liberty Financial Cos. of Boston has drawn the same conclusion. So, the message is clear: If Bill Clinton wins, think small; if Bob Dole wins, think big.

How'd it work? In the four years following President Clinton's win, small-cap stocks underperformed large caps by more than half. In the succeeding eight years of Republican President George W. Bush's time in office, small-cap stocks outperformed by a factor of two. Anyone following the advisors' strategy would have dramatically underperformed a broad index for more than a decade -- and that's before trading fees.

It gets worse from there.

During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%.

Another analyst from The Money Channel gave a bullish endorsement of airline stocks if Bush won the election, noting that "a broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest U.S. airlines were in bankruptcy.

"There's an [easy] way to put your money on the November contest: buy some stocks," another Newsweek article counseled before the 2000 election. "The U.S. stock market hasn't lost money in a presidential-election year since 1940." But then it did in two of the next three election years.

Analysts lined up in 2008 to offer their recommendations before election day. Mad Money's Jim Cramer wrote: "An Obama victory would also be good for solar and wind power. My No. 1 solar pick would be First Solar [ (Nasdaq: FSLR  ) ], the only company in the field with a product that's commercially viable." The bulk of solar stocks have since collapsed, with First Solar down 93%.

If Obama won, Cramer went on to caution, "because of all the negative rhetoric, you'd have to trim both the major oils, like ExxonMobil [ (NYSE: XOM  ) ] and Chevron [ (NYSE: CVX  ) ], and the big drillers, like Schlumberger [ (NYSE: SLB  ) ] and Transocean [ (NYSE: RIG  ) ]." A basket of the four has gained more than 60% since Obama took office.

He wasn't alone. The idea that an Obama presidency would be a boon to green energy and a strike to big oil was nearly universal. Reality, as it has a tendency of doing, has proven quite the opposite.

Jimmy Carter warned in 1980 that Ronald Regan's tax policies would hurt the economy. Instead, it boomed. Ronald Reagan warned in 1993 that Bill Clinton's tax policies would hurt the economy. Instead, it boomed.

You can go on and on. When it comes to presidential elections and your investments, there's only one constant: Those who make specific predictions about the effects of policy tend to lose.

None of this should be surprising. Political scientist Anthony Downs once noted that "politicians don't get elected to formulate policy; they formulate policy to get elected." That's a polite way of saying that politicians will say anything to get elected, and then avoid the hard stuff once in office. We have no idea what either candidate might actually do over the next four years if elected, regardless of what they campaign on today. Even if we did know what policies the next president might enact, we don't know how other business forces might affect certain industries (see: solar in 2010), or whether valuations render those industries poor investments despite the boost of a favorable president (see: pharmaceuticals last decade). The odds are overwhelming that the most important business stories of the next decade will have little to nothing to do with any policy either candidate could enact.  

What should you be doing rather than fiddling with a new strategy before the election? Nothing different from the usual. If you're one of the 90% of investors planning to change your investment strategy based on the election, stop and take a good look at reality, your priorities, and your abilities. You couldn't see the future before the last election. You can't see it today.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares in ExxonMobil and Chevron. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of ExxonMobil and Transocean. Motley Fool newsletter services have recommended buying shares of Chevron. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (47) | Recommend This Article (122)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2012, at 12:45 PM, rhealth wrote:

    Right on! Nice observations. My uncle told me most of what I needed to know about stocks when I was 10;

    Sometimes they go up, sometimes they go down.

  • Report this Comment On August 17, 2012, at 1:20 PM, tweenthelines wrote:

    Can be summed up one word: youneverknow.

  • Report this Comment On August 17, 2012, at 4:00 PM, Darwood11 wrote:

    "stop and take a good look at reality, your investment strategy and your abilities."

    Brilliant!

  • Report this Comment On August 17, 2012, at 4:19 PM, fool3090 wrote:

    Speaks well to buy and hold good companies in personal portfolios, dollar cost averaging with your maxed-out 401k, buying on dips, enrolling in DRIP plans and rebalancing retirement accounts yearly. In other words, sticking with the plan.

  • Report this Comment On August 17, 2012, at 5:56 PM, mogulbangr wrote:

    Who was it that said "Economic forecasts exist only to make astrology look respectable." Right on...

  • Report this Comment On August 17, 2012, at 5:58 PM, CaptRichie wrote:

    We've never had a closet Marxist as president. If he wins again, kiss America as we know it good-bye. Socialized med care will accelerate hurting the private insurers that will quickly close shop as BO's one-payer system takes root, along with big pharma that will see caps placed on its meds. Defense will get decimated to pay for social handouts. The depression will continue and the national debt will soar even higher. The only sure bets: gold (and that's assuming B.O. won't confiscate it) and guns since urban crime along with racial conflict will likely explode due to the lack of jobs and more class warfare. Sadly, this is precisely what our leader wants.

  • Report this Comment On August 17, 2012, at 6:06 PM, JadedFoolalex wrote:

    Fool3090,

    Yours is a million dollar plus plan!! Fool on!

  • Report this Comment On August 17, 2012, at 6:08 PM, BarneyRubbel wrote:

    captRichy - you should read the article, you seem to have missed the point. In regard to your other comments, do you then blame bush for our problems, you should. Or is the president always wrong if you don't like him?

  • Report this Comment On August 17, 2012, at 6:19 PM, s73v3r wrote:

    "During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%."

    I'm guessing there might have been a few more factors involved in this. Just a few.

  • Report this Comment On August 17, 2012, at 6:44 PM, whereaminow wrote:

    If one just settled on using Newsweek, NYT, and every other establishment rag as toilet paper rather than expert advice, they'd have more money and cleaner bums.

    What's even worse is reporting on the drivel they pen and being at all surprised to find out it's drivel.

    David in Liberty

  • Report this Comment On August 17, 2012, at 7:09 PM, TMFMorgan wrote:

    s73v3r,

    To be clear, I'm not placing blame. The point is simply that things are unpredictable.

  • Report this Comment On August 17, 2012, at 7:25 PM, eibe wrote:

    Obama or Romney?

    Do you like cattle with black spots on a white hide or do you like cattle with brown spots on a white hide?

    At the end of the day they both just "moooooooo"

  • Report this Comment On August 17, 2012, at 8:14 PM, jc09058 wrote:

    As usual, another good article about mending you P's and Q's, ignoring the hype, buying into great companies, and siting back.

  • Report this Comment On August 17, 2012, at 8:43 PM, KayOssCapt wrote:

    Only one thing is missing in all of the above comments. Never in the history of this great country have we had a president so bent on "Changing" the American landscape. Obama will change everything you once knew about your country in his last four years. He will not be worried about re-elections and can do as he pleases. I left Cuba with my parents when I was 8 years old in 1960. We left everything we owned except three suit case with which we carried into Miami on a warm sultry September day. Castro said everything everyone wanted to hear. Especially,"Hope and Change" from the previous administration. He took from the wealthy and gave it to the so called poor until there was nothing left and the so called rich left for better living conditions. We will repeat history ( unless Obama loses this election)because enough time has passed that none of us sitting so comfortably in out climate controlled homes wish to remember. This is not the same election that this country can go back and compare to ANY other election.

  • Report this Comment On August 17, 2012, at 9:45 PM, MrSheepish wrote:

    "Obama will change everything you once knew about your country in his last four years."

    Maybe I'm missing something. I wonder which part of his agenda you think is so radical. Is it his support of making RomneyCare a national program (or maybe I should call it NewtCare or HeritageFoundationCare)? Maybe it's his plan to raise tax rates to ... well ... a lower level than they were in the 90's? Is it his proposals to raise fuel economy standards in cars a little bit? Something else?

  • Report this Comment On August 17, 2012, at 11:27 PM, AgeOfRobots wrote:

    @KayOssCapt - Your comparison of the regime change from Fulgencio Batista to Fidel Castro is an inaccurate one.

    Cuba, like most third world nations at the time, existed under a military dictatorship. Batista was a fascist dictator who ended up being replaced with a communist dictator. Whatever the change of the political dressing, the status quo of totalitarianism remained.

    Cuba was not a constitutional republic. As ludicrous as all the chicken littles out there fearmongering about Obama's radical plans for the United States of America are, this nation is still not some carribean banana republic. Obama did not come into power in a military backed "Coup d'état."

  • Report this Comment On August 18, 2012, at 1:08 AM, ershler wrote:

    AgeOfRobots,

    Couldn't of said it better.

  • Report this Comment On August 18, 2012, at 2:26 AM, Intrepidation wrote:

    Do you walk to work or bring your lunch?

    Step back; It's an article about the challenges of changing strategies during an election year. Thanks for the insight.

  • Report this Comment On August 18, 2012, at 11:12 AM, formsmaven wrote:

    Well, I just did the math. Since Obama took office, our portfolios have increased 51%, and that includes a near total loss in BAC. Not bad. The only negative thing I see is the crash if Romney.Ryan get in and kill the economy with austerity measures.

    So, I'm putting trailing stops on our stuff, even though I know I'll regret it later. Every stop I've placed this past year was triggered, and each of those stocks has rebounded past the price on the day I placed those stops.

  • Report this Comment On August 18, 2012, at 11:24 AM, TMFBlacknGold wrote:

    "Another analyst from The Money Channel gave a bullish endorsement of airline stocks if Bush won the election, noting that "a broad tax cut ... has the tendency to increase discretionary spending." By 2005, four of the six largest U.S. airlines were in bankruptcy."

    That may be true, but those bankruptcies were caused in large part by 9/11. Right?

  • Report this Comment On August 18, 2012, at 11:27 AM, TMFMorgan wrote:

    ^ By and large, yes (plus a surge in oil prices. It's also just a poor industry in general). The overall point is that these things are unpredictable, and so saying things like, "If X wins the presidency, buy Y" are usually bad calls.

  • Report this Comment On August 18, 2012, at 1:07 PM, PositiveMojo wrote:

    If Obama is elected you're going to see cash moving from the private sector to the government, and then squandered. That isn't good for any economy no matter how you slice it.

  • Report this Comment On August 18, 2012, at 3:05 PM, Zankudo wrote:

    The coup d'etat was the 2000 election. Insofar as Obama, he has failed in some respects He escalated Afghanistan and his justice department neither prosecuted the folks behind the banks and the Wall Street houses nor the war criminal Bushies.

  • Report this Comment On August 18, 2012, at 4:24 PM, kyleleeh wrote:

    To all the people who keep saying Obama is going change everything in this country I would like to point out two things:

    1. the president is not a dictator, just because he's in favor of something doesn't mean he's going to be able to do it.

    2. based on his last 4 years in office he seems not only willing to compromise with republicans, but flat out caves to their demands quite frequently.

    What are you so worried about?

  • Report this Comment On August 18, 2012, at 7:09 PM, PositiveMojo wrote:

    The only reason we need to be worried about Obama is because he is driving our economy and the outlook for future generations into the ground.

    Consider this:

    * U.S. Tax revenue: $2,170,000,000,000

    * Fed budget: $3,820,000,000,000

    * New debt: $ 1,650,000,000,000

    * National debt: $14,271,000,000,000

    * Recent budget cuts: $ 38,500,000,000

    Let's now remove 8 zeros and pretend it's a household budget:

    * Annual family income: $21,700

    * Money the family spent: $38,200

    * New debt on the credit card: $16,500

    * Outstanding balance on the credit card: $142,710

    * Total budget cuts: $385

    Any questions?

  • Report this Comment On August 19, 2012, at 2:45 AM, chris293 wrote:

    President Obama while he tries, must have the dumbiest business advisers or else as appears here there could be people shorting his business decisons. I always wonder where the liberals, their wivies, etc, made their money. Even some of the information or advise I have read seems strange whereas I can only think they are trying to sell some real losers especially those are still bleeding money.

  • Report this Comment On August 19, 2012, at 3:51 AM, kyleleeh wrote:

    <<Any questions?>>

    Again your assuming that the president makes all the decisions that go into the budget. The truth is that congress plays a bigger part then the president does in coming up with the budget. Republicans and Democrates drew up and agreed to the spending in that budget...it had nothing to do with Obama, and would have happened even if he was not president, since most of the budget is mandatory spending. If you really think this is because of Obama doing something out of the ordinary then why do you have to go all the way back to Eisenhower to find a republican president who didn't run a deficit?

    ...It's because who's in the white house doesn't have that big an influence on the economy.

  • Report this Comment On August 19, 2012, at 8:45 AM, dragonmonkey wrote:

    kahunacfa - please refund the 5 minutes to everyone who accidentally read your post thinking it might have a point

    the other "political" posters - can't you guys find a forum outside MF for your political posts?

  • Report this Comment On August 19, 2012, at 12:50 PM, hemifan426 wrote:

    Captrichie and Positivemojo, right on to both. If ovomit is re-elected, the only thing that will happen is a deepened depression and the end of America al we know it. We will become a communist country with strong ties to ovomits buddies china and iran. It will be a police state with complete government control. Your money will be taken from you and redistributed to illegals and non-working social leaches. America is in deep, deep trouble. Vote against ovomit in November or reeep what you sow.

  • Report this Comment On August 19, 2012, at 1:25 PM, TMFBlacknGold wrote:

    @TMFMorgan

    Unpredictable. Agreed. There's much more randomness than people like to account for. We have a tendency to get comfortable with the perceived patterns that we see, when its really just random noise (see Nassim Nicholas Taleb).

  • Report this Comment On August 19, 2012, at 5:37 PM, rno100 wrote:

    Looking at the executive branch's habit of ignoring existing law (example: GM bailout deal and brushing aside existing contracts) or passing regulations contrary to existing law (example: recent changes in immigration law), I am not sure this President and his administration has gotten the message that they are not dictators. Combine this with this administrations antithetical approach to free enterprise (example Boeing's problems opening a SC plant) and it should be plain to any Fool that the uncertainty this creates in our economy is crushing our investments and even our ability to make a livelyhood.

    As was noted by someone above it is congress that spends the money and you only have to go back to the late 80s Republican congress to find a balanced budget. It should be noted that since that time Republicans when in the majority have spent like drunken democrats. The only hope I see for budget change is the hope that the Republicans have sobered up. Ryan looks promising...

  • Report this Comment On August 19, 2012, at 7:32 PM, Sunny7039 wrote:

    Unless you know WHY a person plans to change their investment strategy, what is the point of providing gross survey results, even assuming they are valid and representative of the population as a whole?

    Do you think that everyone who says they will change their strategy is thinking in terms of whether the President will be a Republican or a Democrat? How about this -- whoever is President will face a growing risk of war with Iran and further problems in the Eurozone? And also, perhaps, will find that the Federal Reserve is more willing to increase the money supply in response to such shocks?

    I am not predicting any of these things. But I sure do keep them all in mind as possible outcomes in 2013-14, and plan to adjust accordingly.

    Unless a person is under 35 years of age, or is already independently wealthy, they cannot merely be an investor. They are going to have to trade. I don't like it, but I recognize it. Yes, it is risky, and it does scare me. But no one can tell me that the way to minimize risk is not to trade, with any portion of their portfolio. That is clearly not correct, either. That, in a nutshell, is the problem.

    And, as a footnote, you also cannot neglect to have significant cash reserves. That is problematic as well in our ultra-low-interest environment. But how else can you protect yourself? I mean, apart from having a couple of million to start with?

  • Report this Comment On August 19, 2012, at 7:43 PM, Sunny7039 wrote:

    PositiveMojo, the economy is never like a family budget. Families don't control the currency or stand behind its value. And, unlike individual debt, government debt is never secured and (absent default) will never die. Individual debt is a contract, enforceable in court and ultimately by the state's police power. Government debt isn't the same kind of contract; maybe it's misleading to think of it in ordinary contractual terms, even though it's usually presented that way.

    This means governments have different powers, and far more power -- to benefit, or harm, the economy.

  • Report this Comment On August 19, 2012, at 7:46 PM, Sunny7039 wrote:

    Anyway, bottom line -- even holding cash is risky, for obvious reasons. A person can't hide from the macro picture and just hope for the best.

  • Report this Comment On August 19, 2012, at 9:38 PM, devoish wrote:

    "During the 2000 presidential election, Newsweek wrote that a win by George W. Bush and the ensuing tax changes could "help banks, brokers and other investment firms." By the end of Bush's second term, the KBW Bank Index had dropped almost 80%." - Morgan Housel

    How come I cannot find a chart of this banking index that goes back to the year 2000? I am kind of guessing that it did not drop from 2000 - 2006, or the next six years after the prediction was made.

    The idea might be correct, but this is probably a bad example.

    The idea might be wrong if you consider how different a Gore response to climate change or Sept 11th or bank regulation might have been compared to Bushes.

    Best wishes,

    Steven

  • Report this Comment On August 19, 2012, at 11:45 PM, kyleleeh wrote:

    <<Looking at the executive branch's habit of ignoring existing law (example: GM bailout deal and brushing aside existing contracts) or passing regulations contrary to existing law (example: recent changes in immigration law), I am not sure this President and his administration has gotten the message that they are not dictators.>>

    The GM bailout deal begain in November 2008 under the Bush administration. Just like the bank bailouts Obama merly continued the policies already set in motion by the the previous Republican president...how does that make him a socalist or a dictator?

  • Report this Comment On August 20, 2012, at 11:57 AM, stewlish wrote:

    I quit reading about a third of the way down, because it was wearing me out. I had no idea how many so called "investor types" would be drinking the "Obama Koolaid"!

    Simply the slightest common sense about the upcoming election would reveal that electing Romney will set the free enterprise "juices" flowing once more, as the shackles are removed or at the very least loosened from businesses... both large and small.

    I certainly already know how impossible it is to reason with liberals... their minds are tightly sealed. However...

    Obama, environmentalists and other feel-good, regulate, tax and impede idiots from the left are crippling this nation. Why can't you see that?

  • Report this Comment On August 20, 2012, at 12:32 PM, SteinwayB731 wrote:

    Very informative, especially the comments from all of our reader experts.

    Liberals versus Conservatives. Bush haters versus Obama haters. The sky is falling. Inflation is just around the corner. America is fork-ed. It's Obama's fault. No wait, it's Bush's fault. Buy stocks. No wait, hit the panic button and sell all your stocks.

    There's only one constant in the world, and the author sums it up nicely: nobody knows s*$t. Nowhere is this more obvious than in the comments that ensue following such an article.

  • Report this Comment On August 20, 2012, at 4:36 PM, hbofbyu wrote:

    If the only constant is that no one knows sh*t then what is the point? Let's put all our money in the lottery.

  • Report this Comment On August 24, 2012, at 1:06 PM, 1rghlv1 wrote:

    Face it-Your problems with Obahma are as follows:

    1. He's Black

    2 And a Democrat

  • Report this Comment On August 24, 2012, at 7:10 PM, 2motley4words wrote:

    @SteinwayB731:

    Yours is by far the most compelling comment of all. (To quote one of the other posters, "Why can't anyone see that?")

  • Report this Comment On August 24, 2012, at 8:25 PM, 1022ThirdAvenue wrote:

    BlackandGold

    You wrote that: "Unpredictable. Agreed. There's much more randomness than people like to account for. We have a tendency to get comfortable with the perceived patterns that we see, when its really just random noise (see Nassim Nicholas Taleb)." I have carefully read the volume "Statistical Mechanics of Financial Markets" by Johannes Voit and "The Black Swan" by Nassim Nicholas Taleb. I also have also studied statistical mechanics in a number of disciplines for more than 20 years. The two fatal flaws in the works by both Taleb and Voit, as well as the plethora of pontificating "Chittering Chimpanzees" that claim the market is "random", are embedded in the assumption that the the incremental change is share price is either a stationary Levy process or a quadratic brownian process. Both of these processes lead by a normal probability density function for the incremental price change, which has been demonstrated to be incorrect. From the flawed basic assumption, the standard importunate rhapsody arises that the market is "random" and, therefore, unpredictable.

    If the market were to be truly "random" process, then it will return to its starting point, because it is a one-dimensional random walk in time, an infinite number of times and the recurrence time diverges to infinity. Before diverging to infinity, the infinity minus one times that the random walk returns to the starting part has a finite and predictable recurrence time. That means that the market will return to precisely zero, or any other number that you choose, an infinite number of times and will do so with a finite recurrence time until the recurrence time diverges to infinity.

    Now, let us look at the data: never, in the history of the stock market, has the market returned to zero. Over the history of the stock market, the average annual return has been greater than zero and a significant number of large incremental price changes have happened. Even a cursory examination of the data leads to the conclusion that the stock market, as measured by any index you might wish, is an Ito process with a non-zero drift. If that were not true, then there would not be a single sane investor in the market and the market would not exist. So, enough with this "random" and "unpredictable" nonsense.

    If it makes the "Bush haters" and the "Obama haters" feel any better, my mother is still blaming Clinton for all of the ails of the world. Get real!

  • Report this Comment On August 24, 2012, at 10:58 PM, eng99 wrote:

    I disagree with the conclusion that the stock market is not random because it has never returned to zero. A process can be random even though it has an upwards bias. For example, let's assume that the market is not controlled by buyers and sellers but instead is controlled by throwing a die. If I throw a 1 or 2 the market goes down, on a 3,4,5,6 it goes up. Throwing the die is completely random but the market will not return to zero.

  • Report this Comment On August 25, 2012, at 12:31 AM, SmittyCap wrote:

    I get an absolute kick out of some of you people in your comments. Is it even possible to interpret this article as anything but funny facts about the difference in people's expectations compared with what actually happened? For the people who feel compelled to write angry, essay-length comments in the attempt to seem wise among their anonymous Internet friends- I won't even pretend to have advice for you. Maybe try re-reading the article- then your comment on the article- and if it still seems on point... then God bless ya. There's a place for everyone in the world; and the twits have found theirs in Internet comment boxes. Preach on my brothers.

  • Report this Comment On August 30, 2012, at 4:26 AM, thidmark wrote:

    Newsweek has never been worth a damn on ANY subject.

  • Report this Comment On September 03, 2012, at 12:10 PM, boogerface02211 wrote:

    Morgan, you write excellent articles. You da man.

  • Report this Comment On September 03, 2012, at 12:15 PM, TMFHousel wrote:

    ^ Thanks!

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