Go and vote -- but not with your investment dollars!

[This is a revise of an earlier entry. I thought, with the elections coming, that it would be appropriate to re-run.... Russell]

Bonita, a buddy of mine, calls me on the phone and tells me that thanks to President Bush and his “inane economic policies,” the dollar is due to get walloped. She asks me how to invest in foreign currencies. I caution against it, explaining that financial markets are unpredictable, but she insists. The dollar rises, and her “investment” (I’d call it a gamble) tanks.

Ken, another friend, certain that the GOP is driving this country to ruin, has kept his money in a savings account for the past 6 years. What started off as $70,000, thanks to 6 years of low-but-steady inflation and taxes on his interest, is now worth something less. That same $70,000, invested in a well-diversified, modestly aggressive portfolio, might now be worth $100,000, or more.

I’m not going to get into my own politics. I’m only here to say, whether you are liberal or conservative, please don’t let your politics shoot you in the investment foot.

In our hyper-intense political environment, I’ve seen more and more of this knee-jerk reaction in which people want to move their investments to reflect their political leanings. The ease of transfer of assets has exacerbated this tendency, too, as I’ve noted in my new book, Exchange-Funds for Dummies, published this fall. ETFs are in many ways the perfect vehicle for these politico-investors. Hate what’s happening in Washington? Invest your money in South Africa, Malaysia, or South Korea. Hate especially the oil industry? You can plunk your money in an alternative-energy ETF. It’s easy now to target market sectors for your political support, or opposition.

Ken (the same guy mentioned above), for example, is certain that the exportation of jobs, the dissolution of organized labor, and the resulting squeeze on wages will slaughter the Middle Class. No one will be left to frequent the malls. Stores will be boarded up. The stock market will collapse. He is shocked that it hasn’t happened yet. “How can Wall Street be so blind?!” he asks me. Ken can easily short the market with the ProShares Short S&P 500 ETF. But I wouldn’t advise him to do so.

Wall Street, where very many smart and educated people hang out, is not so blind, Ken. They know that even if you are right, even if history proves President Bush to be the buffoon that you think he is, even if Republican politics is driving this country down, it doesn’t necessarily mean that stocks will suffer.

Knowledgeable investors understand that market movements in the short term, and possibly well beyond, are largely random. Studies that show the huge disconnect between market returns and practically anything and everything else going on in the economy. Consider these tidbits:

• Researchers at the London School of Business recently found that a comparison of stock market returns around the world shows a generally inverse relationship between total market returns and a nation’s economic growth rate.

• And speaking of things Londonish….England started off the past century as the undisputed #1 World Power. It ended up the century with a lost empire, sky-high unemployment, and crumbling inner cities. During that time, of course, the United States came to dominate the known universe. Return of British large stocks, past 50 years: 11.8. Return of U.S. large stocks, past 50 years: 10.7. Looking to small stocks, the Brits beat us by a mile.

• Consider the history of disaster. (Always fun to do!) 1918, the year of the flu pandemic, the worst disease outbreak in modern world history, was a good year for stocks….1942 (Japan attacked Pearl Harbor; Hitler marched across Europe) was a great year…. 1962 (Cuban Missile Crisis, near destruction of entire world) wasn’t so bad…In contrast, in 1929, when the market began its Mother of all Nosedives, nothing terrible was going on. Ditto for April 2000, the start of the 3-year bear market that shredded so many Americans’ 401(k)s.

• Compare China to India. China's gross domestic product grew by an average of 9.0 percent during the past decade; India’s grew by less than 6 percent during the same period. 10-year average return of The China Fund: 13.9. 10-year average annual return of The India Fund: 20.4.

I can’t explain all of these paradoxes. No one can, really. They are what they are. But they come with a moral. Here it is: Stock market returns in the United States have averaged about 10 percent a year over the past 75 years. That’s way higher than just about any other investment. Will it continue? I don’t know.
But the stock market has been a pretty darn resilient thing so far. As bad as the current economic climate may seem to you, as destructively idiotic as you may think the current administration’s policies to be, the stock market, in my book, has seen worse.

You want to allow your politics to dictate your investments? Avoid the stock market altogether if you are a Bush-hating liberal. Go whole hog if you are a pro-Bush conservative. You want to be more rational about it? Separate politics from portfolio.

I hope that each one of you votes your conscience on Nov. 7. But I also hope that each of you invests without your political biases coming into play.

Russell