I am cringing slightly while typing that title, if for no other reason than my feeling that far too much of the internet has already been devoted to election politics – in particular, the media feeding frenzy that has largely provided no new or relevant information to voters. In deliberate effort to sidestep all that, I will keep my political discussion fairly neutral and succinct and instead focus on something that has continued to fascinate me about our election process: the coercion of change.
But first things first. My general views on investments and election politics can be summed up as follows: major elections introduce uncertainty around global economic policy; markets tend to respond to uncertainty with volatility, whether up or down. Anything more definitive or predictive than that is liable to be wrong. Global markets are complicated and elections are chalk-full of promises that cannot or will not be upheld. Making forecasts around them is a thankless, and potentially dangerous proposition.
In contrast to markets, voters seemingly love the prospect of change and all the potential that lies entrenched in uncertainty. It appears this phenomenon is well-understood within Donald Trump’s campaign, which has propelled a self-proclaimed Washington outsider to the center stage of American politics with a campaign slogan promising that very change: Make America Great Again.
It echoes the success found by another lesser-known political player across the aisle, who eight years ago united America’s youth with the slogan Change We Can Believe In. It eventually evolved into the more familiar refrain: Yes We Can.
Why is the idea of change so powerful? Conventional wisdom would suggest that it offers a more pleasant alternative to a relatively unpleasant reality. But I would argue that it need not be so unequivocal. Change offers the illusion of control over situations which may be complex, opaque and alienating.
Change is pretty appealing in the investment world for similar reasons. Look at the headlines you see around personal finance. How many of them say Take Account of Your Goals, Monitor That Things Are Invested the Way You Intended, and Then Stay the Course?” Very, very few.
Instead, they flaunt The Five Things You Need to Sell Now to Protect Yourself from the Next Crash” and the Stocks You Must Own in Your Portfolio to Beat Wall Street.” They vacillate between fear and greed, highlight uncertainty and posit that you must continually adjust your tack. The apocalypse is never far away.
Taking a pessimistic view of your current situation – assuming there is something different, something you missed, something that is going to take advantage of you – feels prescient and empowering. It gives you a platform to take action to protect yourself against forces bigger than you.
Consider the following observation from Fear & Greed Trader, which I will not dilute by trying to paraphrase:
Pessimism is intriguing to most because their messages require action. An investor has to do something when they take up the pessimistic approach. On the other hand, optimism means for the most part â€˜staying the course.’ Pessimism is â€˜SELL, it’s another 2008,’ which grabs your attention because it’s an action you need to take right now. Optimism is mostly, â€˜make adjustments as necessary, stay the course,’ which is easy to ignore since it doesn’t require doing anything. Optimism sounds like a sales pitch; most people hate sales pitches. While pessimism sounds like someone trying to help you, with the incessant dire â€˜warnings’ of what may come to pass.
Investing by its nature involves a degree of uncertainty. And no amount of maneuvering is going to take away the discomfort we may feel about this. The trouble with the power promised by change is that it’s an illusion. You don’t actually gain more control over the game; you just get to move your pieces around on the board. In the case of investments, this can mean taxes and transaction costs at best, and abandoning the expected returns of a prudent, long-term investment plan at worst.
Challenge yourself to separate the real need for change from the false promise offered by action alone. While markets sit at near highs, this is the time to run a mental fire drill: if the stock market went down 10% from here, how tempted would you be to change your investment strategy? Build up your conviction now so you don’t fall under the spell of false promises later.