3 Big Ways Politics Affects Finances

3 Big Ways Politics Affects Investments

Each election cycle brings with it a degree of panic and unease. And, this anxiety can also spread to finance for many Americans.

Updated on Mar 11 2020

Each election cycle brings with it a degree of panic and unease. And, this anxiety can also spread to finance for many Americans. This is understandable, as our political and economic systems are heavily intertwined. Political anxiety shouldn’t lead to financial anxiety, though it often does. Politics have a large impact on our economy, and because of financial anxiety, it tends to also influence investor behavior.

Investments are an integral aspect of our retirement planning process, and we’re always looking for ways to improve our returns. If you’re already planning and investing for your retirement, you’re probably paying close attention to the markets. Regardless, it’s important to understand how politics may be shaping or affecting your investments. This way, you can remain informed and prepared for the future. Read on to learn how politics affect your investments:

Bias-Based Investing

Many investors base their decisions on confidence. This could mean their confidence in a particular company or product to succeed. Or, this could be in reference to a general confidence in the economic direction of the country. And, our confidence in our country’s economy is often dictated by our political direction. People often feel more confident when the country is being led by someone whom they trust. Typically, folks are more inclined to trust a politician from the political party they align with. Because of this, people are more optimistic about their investments, and the market generally, when a politician they align with is in the White House.

By the same token, folks can be far more conservative with investments when they distrust the direction of the country’s economy. This means people may be less likely to invest when someone they disagree with is in the White House.

Historically, republican investors have been far more conservative when a democrat is in office. Conversely, democrats invest less when a republican is in office. This is due to their perceptions of the president’s impact on the stock market. And, this practice can sometimes lead to reactionary behaviors. These are behaviors or decisions investors make that aren’t necessarily based on facts, but on feelings and opinions. For example, an investor may sell off stocks for fear of a market dip after a politician of a differing party takes office, despite no other evidence of market trouble.

This illustrates that one of the largest impacts politics can have is on that of investor’s opinions. While the president obviously sets policies that influence the economy and markets, they even more directly influence the opinions and behaviors of investors. So, beware of political biases when investing. These could cause you to miss out on great opportunities, or overcommit to something you otherwise wouldn’t.

Tariffs and Regulations

Politics most directly affect investments when it comes to trade policies. Policies regarding imports and exports can directly affect our economy, and these effects are immediately felt by the stock market. This is also true for industry regulations. New regulations placed upon an industry may require companies to change the way they do business, increasing costs. This increase in overhead expenses and prices can lead to changes in stock prices. Similarly, a decrease in industry regulations could allow a company to cut costs and begin operating with a larger profit margin, leading to a surge in stock pricing.

Because of this, it’s important to pay attention to these political decisions when investing, particularly for retirement. During the campaign season, you’re likely to hear candidates talk about proposed tariffs and regulations, so keep this in consideration. You’ll want to be aware of any upcoming shifts if possible. While you shouldn’t make any rash decisions based solely on political shifts, sometimes being aware can help you react properly.

Taxes and Interest Rates

Tax and interest rates play a major role in the economy, and stand to impact your investments. Typically, increases in tax rates can lead to poor stock performance. And, some stocks may be more specifically affected by tax matters. So, you should be aware of any changes to tax rates, proposed or otherwise.

When investing for your retirement, it’s important to keep an eye on interest rates. Interest rates obviously have a major effect on the economy overall. And, they can directly influence your investments. Usually, higher interest rates will hurt the stock market, as companies begin to compensate for less affordable credit. But, lower interest rates can be beneficial for your investments, as companies are able to receive cheaper credit.

Our political and economic systems are constantly influencing each other, and it’s important to be aware of this. However, it’s also important to keep in mind how politics can influence investor behavior, and not act in a reactionary manner. Try to look at the markets objectively and within the context of industry, and not through the lense of political affiliation. This way, you may find yourself avoiding reactionary behaviors that could hurt your investments.

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