Introduction:
A simple definition of investing is the goal of putting money into things that grow faster than it would if it was in a savings account. Your investment dollars are your hard-earned money, and you want them to achieve an acceptable return for your level of risk. Putting those dollars to work using a structured process of quality investments in a diversified portfolio, monitored and rebalanced over time, is a great way to attempt to reach your financial goals. When we mix our investment dollars with political beliefs, we often work against our own goals. Political risk is a form of systematic risk that investors should be aware of and factor into their investment decisions and risk management strategies.
In the realm of personal finance and investment, individuals often face the question of whether to intertwine their investment approach with their political views. While it is natural for personal values to influence decision-making, there are several compelling reasons why keeping investment approach and political views separate can be beneficial. This article explores the importance of maintaining this separation and the potential advantages it offers for investors.
Investment Objectivity:
By keeping investment approach and political views separate, individuals can strive for greater objectivity in their investment decisions. Political biases, beliefs, and affiliations can cloud judgment and introduce emotional biases that may hinder rational investment choices. Separating the two allows investors to focus on financial data, fundamental analysis, market
trends, and other objective factors that are more likely to yield sound investment decisions.
Maximizing Returns and Managing Risk:
Political views often drive personal preferences, including a desire to support or avoid certain industries, companies, or sectors based on their alignment with political ideologies. However,tying investment decisions solely to political views can limit opportunities for diversification and potentially hinder portfolio performance. Separating political views from the investment approach allows investors to objectively evaluate opportunities across various sectors, industries, and asset classes, potentially maximizing returns and managing risk effectively.
Mitigating Volatility and Market Turbulence:
Political landscapes are inherently volatile and can be subject to rapid changes. Linking investment decisions to political views can expose portfolios to unnecessary volatility and market turbulence. Separating politics from investment approach enables investors to focus on long-term financial goals, market fundamentals, and economic indicators rather than reacting to short-term political developments. This approach promotes stability and helps investors avoid knee-jerk reactions that could lead to suboptimal investment outcomes, like selling quality investments in a down market or when we have a change in administration.
Political risk is generally considered a form of systematic risk within the context of investments, since they can impact a wide range of investments, market segments or industries. Systematic risk is broad and is not tied to a particular company or investment. Unlike unsystematic risk, which can be reduced through diversification, systematic risks impact the overall market, market segments or industries and cannot be easily diversified away.
Political risk arises from political events, actions, or policies that can impact the economy, financial markets, and can broadly affect individual investment portfolios. Examples of political risks include changes in government regulations, trade policies, taxation, geopolitical conflicts, civil unrest, and policy instability. These factors can be domestic or international and can introduce uncertainty and volatility into the market, affecting the performance of investments across sectors.
Investors need to consider political risk alongside other types of systematic risk, such as economic conditions, interest rates, inflation, and market volatility. Mitigating political risk can be challenging, so investors should employ diversification strategies across regions and sectors.
Customizing Investments to Individual Goals:
Every individual has unique financial goals, risk tolerance, and investment time horizons. By separating their investment approach from political views, investors can focus on aligning their investments with their specific goals and risk profiles. Personal values and political views may not always correlate directly with optimal investment strategies. By maintaining separation of their personal values and political views, investors can build diversified portfolios tailored to their financial objectives, ensuring a better chance of achieving their desired outcomes.
Preserving Interpersonal Relationships:
Political views can be deeply personal and divisive. Mixing investment decisions with political views can strain relationships with friends, family, or colleagues who may have differing opinions. By keeping investments separate from political discussions, individuals can maintain healthier and more harmonious relationships, avoiding potential conflicts and maintaining focus on shared goals and interests.
Conclusion:
Keeping investment approach and political views separate offers several significant advantages for investors. It promotes objectivity, enabling individuals to make sound investment decisions based on data and analysis rather than personal biases. This separation also allows for maximizing returns and managing risk effectively by diversifying investment opportunities across various sectors. Moreover, separating investments from political views can help mitigate volatility and market turbulence, fostering potentially improved long-term stability in portfolios. By customizing investments to individual goals and avoiding unnecessary conflicts, individuals can preserve interpersonal relationships and maintain focus on shared objectives. Ultimately, separating investment approach and political views empowers investors to pursue their financial goals with greater objectivity and clarity, potentially leading to more successful and fulfilling investment journeys.
Next Steps:
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Private Executive Wealth Management and LPL Financial are separate entities. Private Executive Wealth Management and LPL Financial do not provide legal or tax advice. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a decision. There is no guarantee that the strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
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