The House of Common Sense: Playing Politics With Your Portfolio

When you receive this newsletter, we will be in the teeth of a Federal election. Rhetoric will be flying in all directions and various pundits will be pronouncing on the potential economic effects of this or that policy proposal from the various parties.

Given the volume (both in amount and in decibels) of material, it would not be unusual for one or another proposal to cause investors to worry about its effect on their portfolio.

While there is no question that political decisions can have some effect in determining the relative attractiveness of certain investments, I think we sometimes give them far more credit than they deserve. This reflects the fact that for investment fund managers, the fundamentals never change.

Consider the manager of a broadly diversified equity fund: when the manager is identifying companies to invest in, most are looking first at the company – what markets are they selling to, what is their cash flow and is it growing, what is their profitability and how is that improving, what are the barriers to entry for competitors in that industry, etc.

For such “bottom up” managers, a political consideration might enter at the margin: for example, in the current environment they might give a pass to investing in (for example) an American company that earned most of its revenue from selling to China.  

Managers who consider the overall economy to base their decisions, rely more on macro factors such as inflation, interest rates, and where we are in the business cycle.

In a time of political argument, there is some comfort in knowing that investment fundamentals stand the test of time. Should re-assurance be required however, a portfolio review with your Scrivens advisor provides a nonpartisan solution to keep you on track.

In this, the 75th anniversary of the D Day landings, we are reminded of the sacrifice that was made to preserve our right to choose our political representatives. Your vote is indeed an investment in your future.