Don't Mix Politics With Your Portfolio!

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2MuchCents is not a political blog, and it never will be. I hesitated to even write this post, but too many of my friends and clients have been wanting to invest based on their politics. You can’t be excited about the economy the night before the presidential election and want to liquidate all your investment accounts the next day. You can’t be conservatively invested the night before the presidential election and want to invest in all stocks the next day. Strike that. As I have experienced over the past ten months, evidently you can, but you shouldn’t.

In light of my trying to convince you that you shouldn’t let your side of the political aisle drive your investment philosophy, I did some research. Below, please find a graph illustrating my findings. On the vertical axis, you will see the cumulative returns of the Dow Jones Industrial Average (DJIA) during each presidential administration since 1901. On the horizontal axis, you will see C-SPAN’s 2017 presidential rankings of each presidential administration since 1901. These rankings are based on historians considering things like public persuasion, crisis leadership, economic management, international relations, pursuing equal justice for all, and performance within the context of the times.

What do you think?

Do you like the stock market returns during the time of Calvin Coolidge? With apologies to President Coolidge, do you remember any of his accomplishments (he lowered the national debt and cut taxes)?

Theodore Roosevelt, John F. Kennedy, and Woodrow Wilson were three of our most beloved presidents. Teddy Roosevelt was a “Rough Rider,” he stood up to monopolies, he facilitated the construction of the Panama Canal, and he had an awesome mustache! JFK was a decorated Naval hero, he cut taxes, he worked towards civil rights for African Americans, he was responsible for the Equal Pay Act, and he didn’t blink during the Cuban Missile Crisis. Woodrow Wilson led the United States to victory in the First World War, he created the Federal Trade Commission, he helped secure women the right to vote, and he established the eight-hour workday with additional pay for overtime. Do you find yourself wishing that one of these presidents was back at the helm, or do you find yourself wishing for better stock market returns?

When I look at this chart, I see two trends. First, Democratic presidents over the past 116 years tend to be highly ranked. Second, as the trend line shows, presidents who presided over periods of significant stock market growth tend to be remembered fondly and highly ranked. Now we could discuss whether significant stock market growth during an administration is due to a president’s policies, their predecessor’s policies, or just the luck of the draw, but that is for another day and another setting.

When I consider this chart, I see some blue dots (Democratic presidents) I like and some red dots (Republican presidents) I like. I see some blue dots I don’t like and some red dots I don’t like. I see some stock market returns I like and some stock market returns I don’t like. However, the blue and red dots I like don’t seem to always line up with the stock market returns I like. I bet that’s the case for you, too!

I don’t place wagers on sporting events for a lot of reasons. One of those reasons is that I was born and raised in metro Atlanta, so I unfortunately have a pretty good idea about how my local teams are going to do in big games. Another reason is that despite my fun superstitions and routines, I have come to accept that there is no real relationship between the love I have for my team and their performance. It’s one thing to bet $100 on the Braves, Falcons, or Bulldogs, but it’s an entirely different thing to bet your nest egg on your politics!

They say you shouldn’t mix business with pleasure. It would also be my counsel not to mix your politics with your portfolio!

-Tom

The Right Answer

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With all of the great college football bowl games that have been on television recently, I have seen a lot of fans doing some pretty strange things. Some fans are flat out in costume. Some are chanting the same words over and over, while some are constantly jumping in place, and some even make animal sounds during kickoffs! I can’t help but think of that old Bud Light commercial showing fans doing similarly strange things in an effort to somehow help their teams win the game. The slogan reads, “It’s only weird if it doesn’t work.”

In my world of financial advice, people ask me questions all the time. Sometimes I know or can find the “correct” financial answer pretty quickly, but most of the time I need to develop some sort of probability analysis or perform a calculation or projection before I can offer the “correct” numerical solution. The thing is, my initial “correct” financial answer or “correct” numerical solution isn’t always right for the client who asked the question, and it’s not because of faulty research or incorrect math; it’s because it doesn’t yet factor in my client’s feelings or emotions. The slogan for the financial advice I try to give to people would read, “It’s only correct if it works for you.”

Let’s say someone has $10,000 to invest and asks me if they should invest it all in gold. Let’s say a retired person who has more assets than they likely need to continue to live comfortably is really concerned about the world situation and asks me if they should invest $10,000 of their assets in gold coins to put in their safe deposit box. My long-term investment advice would probably be the same to both parties, but it might not be the right answer for both parties.

One of the questions I’m asked most frequently is when someone should begin drawing their Social Security. Someone can choose to start at age 62 or wait until age 70 and likely receive a higher benefit for each year they waited, but it is not always an easy question to answer. If two 62-year-old clients with the exact same assets and retirement incomes asked me if they should start Social Security, but one of them is losing sleep because they are concerned that the government might change their benefits if they wait to start drawing Social Security, my Social Security advice would probably be the same to both clients, but it might not be the right answer for both clients.

If two people can finally pay off their low-interest student loans or make their annual IRA contributions, but one of them has really been struggling with the fact that they still have student debt, my cash utilization advice would probably be the same to both people, but it might not be the right answer for both people.

My point is that almost all financial decisions are double-edged. There is often an analytical or numerical “correct” answer and an emotional “correct” answer. When those are the same, it’s easy to decide what to do, but when they are different, it can be quite the conundrum. Some of the deepest and most meaningful conversations I’ve ever had with clients have come from discussions where financial expertise seemed to suggest one thing and emotional credence seemed to suggest another. I take the privilege of being a part of such conversations very seriously, and it is because of conversations like these that I know no software, no app, no robo-advisor, and no strictly commission-based broker can completely replace my role in helping people think through the tough financial decisions to find their right answer.

When you find yourself facing a tough decision where your emotions and finances seem to be pushing you in two different directions, proceed with caution! Be careful relying on what you’ve read, what you’ve heard, what your computer says, and what Bob told you he did that time in the break room. Remember, it’s only correct if it works for you, and I’m happy to try to help you find your right answer.

-Tom

Save the World and Your Budget

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I think all of the Earth Day billboards, television commercials, and radio ads have gotten to me. Maybe it was all of the time I spent looking out the window at the beautiful, glistening winter wonderland while I was working from home during those couple of weeks in February. Who knows what exactly motivated me to go down this road, but I thought I’d share some thoughts on how you can merge cost savings and investing with your inner “tree-hugger.” Here goes:

1. Adjust your temperature settings - Whether you get in the manual habit of adjusting the temperature a few degrees right before you leave the house for work and right before you go to bed or you have one of those fancy, programmable thermostats, paying attention to your temperature settings can save energy and money. Now, don’t go to extremes during the day and crank your air conditioning at night (or else the extra energy it takes to get your house cool could actually take more energy and cost more money), but a few degrees here and there can actually provide some cost savings.
2. Use energy-friendly and eco-friendly light bulbs - They still cost a little more upfront, but these bulbs use less electricity (which can lower your power bill), and based on my experience, they really do seem to last longer. Buying one pricier bulb instead of several cheaper bulbs over the course of a few years provides some cost savings on the light bulbs themselves and also means less harrowing adventures on the ladder!
3. Print less - Paper is expensive, and print cartridges are just ridiculous. Do you really need to hit print when you’ve got a perfectly good digital copy at your disposal? Can you spell check and proofread a little more carefully so you don’t have to print multiple times? What about double-sided printing to get twice as much per page? Save some trees and some money!
4. Do a home energy audit - I know people who can probably do this themselves, and I know people (like me) who would probably be better served to have a contractor take a look, but the eventual savings from undergoing a home energy audit and making a few changes/upgrades to your residence can be substantial. Leaky air flow, poorly sealed windows, and less than stellar insulation could be causing you to use a lot more energy, and in turn, causing you to spend more. A home energy audit may be especially worth consideration if your home is older.
5. Work from home - If your employer will allow it, try working from home periodically. If you can stay focused, you will probably get more done than you would at work, and more importantly, you get to stay in your embarrassing bedroom slippers while saving gas money and reducing emissions.
6. Invest your portfolios in a Socially Responsible Investment (SRI) strategy - This won’t save you a lot of costs, and it could help or hurt your investment returns depending on the particular market cycle, but if you feel very strongly about only investing in companies with environmentally-friendly and non-health-damaging products, this may be for you. Typically an SRI strategy excludes things like stocks from tobacco companies, alcohol companies, lumber operations, and oil and gas companies. Some SRI strategies go so far as to exclude bonds from certain countries that don’t have glowing human rights records or companies whose boards of directors don’t seem to act as good citizens. I know people who love this type of investment strategy and are willing to pursue less-than-optimal investment allocations because they feel their personal principles are more important, but I do not advise this type of strategy for most. If you are interested in this type of strategy, I should caution you that what is socially responsible is sometimes highly subjective, so finding a mutual fund that shares your politics and views perfectly could be challenging, and unfortunately for SRI investors, sometimes companies like Phillip Morris, Anheuser Busch, and Exxon can be pretty good investments.

 

You know I’m all about saving some money, but I’m certainly not opposed to saving the world. I hope you’ll try steps 1-5, and if you feel passionately about what your portfolio is actually invested in, consider number 6.

 

Happy Earth Day!

 

-Tom

Shutdown!

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As of midnight on October 1, 2013, the U.S. federal government has temporarily been shut down. There is a whole host of reasons for the shutdown and many politicians are already playing the blame game, but the actual reason for the shutdown is that Congress and the President could not agree on a bill allowing the government to spend money going forward. Said another way, the Constitution requires Congress to pass spending bills to fund the government, and when they do not (or the President vetoes the bill), most functions of government come to an abrupt halt until they do.

It’s been a while since the last U.S. government shutdown in 1995-1996 when President Clinton and the Republican-controlled Congress got in a fight over the 1996 budget, but don’t get too excited. It’s not like this is really a rare event. According to the Congressional Research Service, there have been 17 shutdowns since 1977! Most shutdowns last less than a week, but the longest lasted 21 days in 1995-1996. Sure, there could be some stock market volatility, there could be a little damage to the economy, and some national landmarks and small agencies could very well be closed for a while, but most essential government services like air traffic control, the military, Social Security, and Congress members’ pay (that’s essential?!) will continue rolling along until this Congressional lover’s spat comes to an end.

I hope you know me well enough to know that I’m not going to try to convince you how you should assign blame among the House of Representatives, the Senate, and the President (that would be too easy as all of them have egg on their face in my book), but I couldn’t pass up this opportunity entirely. You see, the government shutdown offers some lessons for all of us.

• If you see that you have an approaching cash flow problem or major expense, pretending it’s not really there until it’s almost upon you is probably not a good idea. We citizens cannot simply increase our debt ceiling, sell some more bonds, or set a new interest rate to get around our problems!
• If you are facing a difficult or controversial financial decision that is not solely yours, waiting until late the night before the decision is due will probably lead to a verbal altercation. If you get into a disagreement with someone when trying to work out a financial compromise, stay away from name-calling, stay away from blaming, and try to stay focused on the issue at hand as opposed to bringing up all sorts of other issues from the past.
• If you are trying to successfully plan for something big, say, running a country, providing for your child’s college education, or retiring with the lifestyle you’ve always wanted, you need a long-term plan! Little-bitty, month-to-month, stopgap budget bills finally didn’t work for our country, and little-bitty periods of living within your means, saving, and investing won’t work for you, either! This may sound a little crazy, but a financial shutdown for an individual person or family is relatively more catastrophic than a government shutdown. A normal person can’t just retroactively go back and make things better.

Oftentimes when I try to consider the problems we face in today’s world, I find myself looking to history for answers. When it comes to this current government shutdown, I look to two of my favorite leaders, Abraham Lincoln and Winston Churchill. When addressing the division facing the union in his first inaugural address, Lincoln stated, “If the minority will not acquiesce, the majority must, or the Government must cease. There is no alternative, for continuing the Government [other than] acquiescence on one side or the other.” Lincoln was speaking about a different issue in a different time, but his words ring true today regarding this current government stalemate. Hopefully you’ll be able to sleep easier, like me, if you take the actions of our dysfunctional government in stride and reflect on the words of Winston Churchill: “You can always count on Americans to do the right thing – after they’ve tried everything else.”

 

-Tom

My Fellow Americans

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My Fellow Americans:

By this time tomorrow, President Barack Obama or Governor Mitt Romney will be our next president-elect. By this time tomorrow, television channel 2, channel 46, and channel 202 will either be rejoicing or mourning. Channel 360 will have launched fireworks across its scrolling bottom line, or its pundits will already be discussing the year 2016. By this time tomorrow, close to 50% of the country will be happy and 50% of the country will be disappointed, but we need to keep this in perspective.

Regardless, the campaign or “easy” part will be over, and our elected leaders will face the same challenges our country did this morning. Our national debt will still be more than $16,000,000,000,000, our annual budget (which Congress hasn’t officially passed in more than 3 years) still isn’t sustainable, our unemployment rate is still high, our consumer sentiment is still pretty low, and our individual and corporate tax laws need substantial reform. In order to save you from additional political fatigue, I’m not even going to begin listing the serious national security and social issues our country is facing.

However, even if the candidate you preferred does not win, it’s important to take comfort knowing that our nation still remains one of the strongest in the world. Other countries still flock to our economy and currency for stability and opportunity, we have the best armed forces, and in the words of Winston Churchill, “Americans can always be counted on to do the right thing after they have exhausted all other possibilities.” We can only hope that our nation and its leaders prove the late prime minister correct going forward.

I’m expressing my perspective because my friends, family, and clients have driven me to be neither a Democrat nor a Republican. I simply believe both parties have done America wrong, and it’s going to take both parties to set America right. While I acknowledge many of my values and beliefs are fairly ingrained, in this historically divided political climate, I often find myself trying to pull supporters of the far left to the right and pull supporters of the far right to the left. The Democratic Party has better plans and ideas on some issues, and the Republican Party has better plans and ideas on others. It’s important to acknowledge that there is no way that 150 million other Americans have a “stupid” opinion just because it is different than your own. In my opinion, our government and we, the people, should recognize the need for swift action from our government on many issues and start walking towards each other in a middle-of-the-road, compromising kind of way. Since when did it become more important to win red versus blue and not win as the red, white, and blue?

So what does politics have to do with personal finance? More than it should. Many of those same friends, family members, and clients who have driven me to try to see things from the middle have slowly been allowing their political views to seep into their investment philosophy. As a financial planner who is trying to be a trusted advisor, I cannot let you do that. It’s at least my duty to try to help you differentiate your politics from your portfolio.

What impact should the immediate election results have on your long-term investment strategy? Probably not much. Look, neither I, nor anyone else, know what the markets are going to do in the short term, but I do know that over the long term, they will rise. I don’t know which sector will perform the best in the first quarter of 2013 under a Romney or Obama administration, but I do know that your current interest rate on your cash accounts or Treasury Securities isn’t going to win versus inflation. I don’t know which candidate is going to hit the magic 270 in the Electoral College tonight, but I do know that the intrinsic values of well established companies like Home Depot and Coca-Cola are not going to diminish that much regardless of the election outcome.

If by tomorrow you are not sure you can emotionally or physically get through the next four years based on how your investments are allocated, then maybe you should do something. If you feel this way though, chances are you probably should have started doing something differently a long time ago, not just because of this election. If the election results give you an impulse to change your portfolio to 100% equities or 100% cash and gold, please step away from the televisions, radios, and social media sites, go to sleep, and call your financial advisor in the morning after you have had some time to cool down and differentiate your politics from your portfolio.

I stay away from politics on 2MuchCents as much as I can, but I felt like this needed to be said. Next time we’ll also be looking at some investing tips, but in terms of fantasy football.

Go vote.

-Tom