Political opinions, of any kind, can seriously reduce your investment returns. Anti-capitalism and nationalism are among the most harmful biases, but they are by no means the only ones.
As the clock ticks down to this most extraordinary of election seasons in the US, there is a lot of political noise for investors and wealth managers to contend with. A difficult, perhaps sensitive question for clients is whether and when they should allow their political judgements to influence where they allocate capital. To some extent this is already happening in the area of ESG – environmental, social and governance-based investing. But how should one’s views on the respective merits of a political candidate or policy affect asset allocation, either on the strategic or tactical side? Furthermore, can one’s political biases affect a portfolio? Consider that the field of behavioural finance arguably includes politics. Views about inequality, justice, entrepreneurship, liberty and the proper role of the state aren’t always as rational as investors might like to think.
That’s a lot to think about, and a writer who is unafraid to hold up ideas to scrutiny is Dr Rainer Zitelmann, author of a number of books about attitudes to wealth and business, as well as being an investor and academic. This news service welcomes Dr Zitelmann back to these pages. The editorial team are pleased to share these insights and invite readers to respond. Jump into the conversation! The usual editorial disclaimers apply. To comment, email firstname.lastname@example.org and email@example.com
In countries where large portions of the population are staunchly anti-capitalist and harbour strong prejudices against the rich, levels of stock market investment are far lower than in countries where people feel more positive towards capitalism and wealth. And this, of course, has a negative impact on investment returns.
German investors are frequently criticised for the fact that their investment portfolios are underweight in listed stocks, with equities accounting for a far smaller proportion of total financial assets (5.6 per cent) than in the US (22 per cent) but slightly higher than in France (5.2 per cent). This is, of course, correct, but according to the Alliance Global Wealth Report 2020, doesn’t tell the whole story: German households invested 5.8 per cent of fresh savings over the last six years in the stock market, compared with just 1 per cent over the last three years in France.
In each of these countries, there would certainly seem to be a link between investment behaviour and attitudes towards capitalism and wealth. The Edelman Trust Barometer, which surveyed 34,000 people in 28 countries, reveals just how widespread distrust of capitalism and the super rich is around the world. Among the survey’s items, the statement that “Capitalism as it exists today does more harm than good in the world” attracted more support in France (69 per cent) than in any other developed country. In Germany, 55 per cent of the survey’s respondents agreed.
In contrast, the 47 per cent who agreed in the US were 22 per centage points lower than France. These figures tally with the findings of my own study, The Rich in Public Opinion, which showed that social envy is significantly higher in France, which registered a social envy coefficient of 1.21, compared with the US, where the social envy coefficient is only 0.42. In fact, the coefficient was higher in France than in any other country in my study. It is obvious that people who have extremely negative attitudes towards capitalism and the rich are not likely to think highly of stocks and the stock market.
Nationalism can also be harmful
So, it is clear that an anti-capitalist bias can lead to unwise investment decisions. Well, the same can also be said of nationalism. The French are not only socially envious, also they are not all that astute when it comes to diversifying their investment portfolios between domestic and foreign shares. In fact, the small percentage of French investors who actually invest in listed stocks make one of the biggest mistakes any investor can ever make. French investors suffer from a strong “home bias,” as the above Allianz study shows. “Home bias” is the tendency for investors to invest in stocks from companies in their own countries, a longstanding phenomenon that scientists have observed in many countries around the world. French investors hold only 15 per cent of foreign shares in their stock portfolios, in contrast to German investors, who own almost four times as many, at 54 per cent. Of course, investors might get lucky and see domestic shares outperform a globally diversified portfolio in any given year.
However, long-term studies show that investors who are subject to “home bias” have significant yield disadvantages compared with those who are not. I like the fact that the French are more optimistic about their own nation than Germans are, but when it comes to investing, a strong sense of loyalty to one’s own country can do serious damage.
Don’t let your politics get in the way
I have been interested in politics all my life and have very strong political opinions but, when it comes to investment decisions, I put my personal opinions to one side. For example, my views align with a lot of libertarian positions and I am a great admirer of the books of Ludwig von Mises and Friedrich August von Hayek. However, I often find myself disagreeing with people who otherwise share my political views, but make the mistake of basing their investment strategies on those views. They raise a series of rational objections to paper money (“Fiat money”), but then conclude that this means they should invest their money in crypto-“currencies,” like Bitcoin. I use quotation marks around “currencies” here because they are not really currencies at all. There are lots of reasons why I don’t like Bitcoin, in spite of the fact that speculators who entered the market at the right time earned great returns. Nevertheless, I am not a speculator, I am an investor. And my investments are completely apolitical – and I have done very, very well from them.
My advice, therefore, is this: No matter what political convictions you hold, forget them all when it comes to investing money. Investors who care about the environment should nevertheless steer clear of “green” investments and investors who love their own countries should ignore any patriotic stirrings when they are deciding where to invest. Investors who are put off by capitalism should bite the bullet and invest in stocks, while libertarians should nonetheless give Bitcoin a wide berth. Of course, you could ignore my advice - but only if you are prepared to accept a lower rate of return.
The author is an historian, sociologist and Investor. The Cato Institute recently published his book The Rich in Public Opinion.