Article by Marcel LeBlanc for the Times & Transcript published on October 8, 2019

As we watch the US political circus continue to climb to new heights with talks of impeachment, many investors wonder how these events could impact future investment returns.

jorgen haland QVeRgFErOPs unsplashFirst, it’s important to get a grasp on what is going on. Essentially, the House of Representatives has decided to move forward with an impeachment inquiry against President Donald Trump. If the findings are sufficient, one or more articles of impeachment will be voted on by the House of Representatives which is currently controlled by the Democratic party. A simple majority vote is needed for the impeachment to move forward and stand trial in front of the Senate which is controlled by the Republicans. A super-majority vote of two-thirds of the Senate is needed to remove the President. Impeachment proceedings usually take several months while the next US election is a little over one year out. At this point, no one knows how this will end.

Political risk has always been a part of investment risks and has grown to represent larger portions of total investment risk as businesses and investors benefit from globalization. With the US being one of the largest developed economies and investment markets in the world, it would make sense that heightened political tensions would have some repercussions for businesses and investors in and out of the United States. However, political uncertainty is nothing new, even in developed countries. One could argue that there has been plenty of uncertainty since Trump took office. If political risk guided market trends, we would have seen very different investment results in recent years.

In the past two formalized US impeachment inquiries in the 1970s with President Nixon and in the 1990s with President Clinton, there was no obvious impact on US stock market trends due to these political events. As with most of the past highlights and headlines in the US political circus in recent years, this one is just as unlikely to be a market making event. Markets are more likely to move on economic trends than political outcomes.  

It’s normal for investors to want to do something when they see headlines that seem to matter. This tendency is referred to as action bias which says that people will resolve to action in order to gain a sense of control. It feels better to do something than to do nothing. The problem with action bias is that it generally goes against investors best interests. The more decisions and changes investors make, the more likely they are to make the wrong decisions and get unfavorable results. Staying invested has proven to be the best course of action for most investors over time. If this holds true, it might make sense to resist the urge to do something.

I believe that a thoughtful investment strategy combined with a well diversified portfolio should be designed to weather both good and bad times in the markets. These should not be thrown out simply because of headline risks or, even worse, getting pulled in by action bias.