Markets don’t vote. But they do react…to headlines, to uncertainty, and to emotion. And in a heated political climate, that reaction can spook even the savviest investors. So what should you actually do to protect your portfolio?
In today’s politically charged environment, there is so much noise. Many of my clients—on both sides of the political aisle—are asking me how the political climate is going to affect their investments. And I get it. It can feel really disorienting when all the headlines are alluding to an economic crash.
Thankfully, there are some tried-and-true ways to mitigate investment risk, even in the midst of cultural unrest. I’m going to lay those out here, just like I would for my clients.
It’s important to remember, before I dive in, that this is not new. Let’s get that straight. The ‘politics and investing’ entanglement has been going on for years and years and years. That means we have a lot of data and anecdotal evidence about what to do when tensions rise.
From an a-political investment perspective, here are five steps that you can take to help mitigate some of the political risk in your portfolio.
1. Focus on Fundamentals, Not Headlines
A lot of people get caught up with the 24-hour news cycle. I see it all the time in my office. It doesn’t matter if you lean left or right, the news outlets that are targeting your interests are trying to get and hold your attention. They’ll report on anything that fogs a mirror and then sensationalize it the best they can.
We’re seeing this on cable TV, of course, but it’s also all over social media and in our podcasts. Ultimately, it can be very challenging to decipher what investment decisions to make when the information you’re getting is stirring up your anxiety.
From this perspective, it’s important to consider the overall market or economy. They aren’t necessarily hand-in-hand. Politics, the economy, and the market are three separate things. They can—at some level—be tied together, but just because one moves, it doesn’t automatically imply the rest will follow.
When the government shutdown happened at the end of 2018 / early 2019, there was a huge upset in the market on a short-term basis. There was a big sell-off in the market. But then it roared back as soon as the government shutdown ended. If you sold your portfolio during that shutdown, you missed the gains in the aftermath.
The shutdown didn’t actually alter the fundamentals of the companies or investments you were investing in. The market slip was due to an emotional reaction. And this is a political lever the government can use as a negotiation tactic. We’re seeing that right now.
Another note is that if you’re selling something with the intention of buying it back, you’ve got to get the timing right TWICE to avoid losses. You have to get the sale right and then the buy right. In addition, there are also ‘wash sale’ rules around buying the same stock you’ve recently sold. So there are inherent challenges here to consider, as well. Holding onto your portfolio through upsets in the market is usually the wise choice.
2. Diversification is Your Best Defense
Diversification is wonderful. It may be the best defense to some of the political challenges that we’re faced with, even right now. The tariff conversation is a great example.
Diversification is basically that you own a variety of investments. You might have tech stocks, industrial stocks, consumer discretionary stocks, and all these different sectors that you could be exposed to. These various stocks will go up and down. They will somewhat correlate to each other, meaning when the broader market goes up, they will likely go up with it, but they won’t be directly tied together. You can also do this with different asset classes and asset types across funds.
What you’re doing by diversifying is spreading your risk across various investments and industries. If you had all of your eggs (investments) in one basket (sector or industry)—you know the analogy—and the basket breaks, all the eggs break, right?
But if you spread your investments out, you’re more safeguarded. This is where we start talking about having real estate, international exposure, small cap, mid cap, etc.
One of the things we like to do at Four Points Wealth is use risk intelligence software. It’s amazing, almost like taking an MRI of your investment portfolio. We can actually stress test your portfolio to analyze its strength and resilience against a multitude of factors. For example, we can look at how your portfolio may hold up during different market conditions like a global financial crisis.
Historically, diversification has been helpful in mitigating political interference in the market. For example, if you look at the trade wars from 2018 to 2020 between the U.S. and China, you’d notice that tech and agriculture did really poorly during that time. This is largely because a lot of our tech was built in China. And in the agriculture sector, there were some import and export issues. But, basically, tech and agriculture suffered dramatically.
That said, if your portfolio had exposure to financials, industrial companies, consumer discretionary, consumer staples, and other corners of the market, you would have been much more insulated from that experience. The volatility in the market got a lot of headlines, but if you had a well diversified portfolio, you still did fairly well during those turbulent times.
So when certain sectors of the economy are in the headlines, it’s important to take it in context and pay extra attention to diversification in your portfolio. It can be a real benefit for you.
3. Beware of Confirmation Bias
I’m sure you’ve heard of it, but ‘confirmation bias’ is the phenomenon that happens when you’re unconsciously looking for information that backs up your belief. So, you may find articles that double-down on something you already believe and you can use that to ‘confirm’ what you know. You may also avoid trying to find information that could disprove or challenge your belief.
This relates to my first point because, guess what? Most of the headlines you see are targeting the information you already like. (Thank you, algorithms.) And look, this is great if you like hockey or knitting or cooking. But when it comes to the news, you aren’t getting the full picture. Your news feed is curating the information that you’ll engage with, rather than simply offering a bipartisan, balanced view. So it’ll send you news from the ‘other side’ that makes you mad enough to comment. Or news from ‘your side’ that you’ll ‘like’ or subscribe to.
All of a sudden, you’re in an echo chamber.
From an investment perspective, confirmation bias can really throw you off. Because it will either make things look too good or too bad. I recently had a conversation with a client who was really caught up in today’s political climate. She was very upset with everything going on. So I started asking her where she was getting her news. Every single news source, podcast, or other outlet she named had a negative bias toward our current administration. So I said, “Well, of course that’s how you feel.” Once we started unpacking it a little bit, we were able to see that she was so mired in doom-and-gloom, she couldn’t fathom seeing any positive in the world.
It’s not that anyone has to change their view. I wouldn’t ask that of my clients. But when it comes to navigating your finances, it’s important to take a little bit of a step back. Tuning out some of the noise can help you see the forest for the trees.
If your confirmation bias is running the show, you might be inclined to make an emotional decision about your portfolio.
Go back to the Trump campaign of 2016. When Trump was declared the winner of the presidential election, the market was down huge. It was down like 2-3% in the middle of the night. However, between his election day and inauguration day, the market was up like 10%. It was dramatic. And if you just said, “you know what, screw it, I don’t like Trump, I don’t like the Republicans,” and you just sold your whole portfolio, that’s what you lost out on. Financially, you’d have lost a lot of the upside.
And so the idea here is that you just don’t know what the actual impact of the political environment will be. A lot of my clients will come to me and ask who’s done better or who’s done worse with the stock market based on who’s running Congress or who’s President. But the reality is that it’s sort of a mixed bag.
The irony is that it often doesn’t matter because staying invested—and having a sound strategy that isn’t tied to who’s in office—is what will benefit you most.
4. Stay Disciplined and Avoid Emotional Decisions
I’ve peppered this in throughout this article, but it’s worth emphasizing. Politics are inherently very emotional. This isn’t new. It seems very politically charged today and that we’re more divided than ever, but the reality is that we probably just have more information.
But gosh, think about the turn-of-the-century or any politically challenged era. Think of the early 70s when we had a very divided country. We’re in that same world right now. It might not seem like it, but it’s also deceiving that we’re actually in a divided world where we all hate each other. The reality is that we have a huge moderate middle. Unfortunately, we just get the loudest voices from both sides making it seem like we’re in a terrible environment. I would say we’re probably not.
All to say: avoid emotional decisions.
When it comes to your investments, take a deep breath, and maybe just take a step back.
If we think about this from the context of recent history, look at the COVID pandemic. This was something that was just obviously very disruptive socially, culturally, globally, geographically, and also politically. During that period of time, there were six weeks when the market dropped the fastest it ever has in market history. It dipped over 20%. And during that period of time, if you sold your portfolio because you were afraid or angry or emotionally charged, when would you have been able to get back in? Because the market rebounded very quickly. It was partially a political response, where the economy was flooded with capital. But, ultimately, if you held onto your portfolio you would have been in a better position than if you sold it outright.
The political climate is largely out of our control. But if you’re making financial decisions from an emotional space, it’s probably the wrong decision.
5. Understand the Difference Between Policy and Impact
Let’s talk briefly about tariffs. Just because there are tariffs in place, doesn’t necessarily mean it will have the impact that’s being discussed in the media right now. Tariffs are like a tax, right? Could it lead to inflation? We really don’t know. At Four Points Wealth, we’re analyzing the numbers to consider the impact of tariffs—but there are other variables at play that could affect the ultimate outcome.
Let’s look at the 2017 tax reforms, for example, also known as the 2017 Tax Cuts and Jobs Act. The administration said they wanted to benefit small business owners, but there were a whole host of things they incorporated into the new tax codes. At the time, many speculated it could ruin the economy. Some economists projected we’d go into huge amounts of debt. My clients were very concerned, wondering how they should position themselves to prepare for the catastrophe.
But it turned out to be a lot of hot air. Because a lot of the projected concerns didn’t materialize the way we thought they might. Speculation is just that: speculation.
Keep this in mind as you make decisions about your portfolio. If you’re worried about how new laws and regulations could impact the economy, try to keep your eye on the big picture.
These five strategies to managing your portfolio during times of political unrest are what we talk about with our clients frequently. While the political environment is connected to your investments, the direct correlation is actually pretty weak.
Most of the time, you do not need to react to a political directive through your investment portfolio. If you are considering how current policies might affect your investments, give us a call. We can run the risk analysis software to understand how resilient your portfolio is. We can also run models based on what ‘could’ or ‘might’ happen to help you get a clearer picture of how this political climate might impact you in the long and short-term.
Four Points Wealth Management
About the Author: Taylor Leary is a Certified Financial Planner in Denver (CFP®), specializing in guiding professionals through the complexities of wealth-building and financial planning. With his dynamic, relatable approach, Taylor provides tailored strategies to help his clients achieve their personal and professional goals. Whether it’s navigating real estate investments, retirement planning, or cash flow management, Taylor brings clarity and confidence to every financial journey.
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