If you mix politics with your investment decisions, you're making a big mistake.
⸺Warren Buffet
With the election campaigning ramping up, I have been thinking about how the result might affect the stock market.
So I delved into the history books, researching the returns of the UK stock market since the 1970s when Edward Heath unexpectedly defeated Harold Wilson’s Labour government. The 1970s was the starting point because Labour governments were pretty infrequent before then.
Even when you start at this point, the British constituency has only been ruled under a Labour government 27% of the time. It’s important to note, that Labour often came into power during times of significant economic stress, which typically began well before they were elected. For instance, following his defeat from Heath, Wilson returned to power in 1974 and immediately encountered high inflation and high employment.
Research conducted by Schroders in 2019 gives a very clear picture of how certain governments influence the stock market. Schroders indicates that under the Conservatives, the UK stock market has grown by 11.6%, whereas under Labour, growth has been significantly lower at only 9.0% per annum.
What does all this mean for you as a Navigate Portfolio investor?
I have spent over a decade trying to persuade investors that the best stock market is the global one. The UK stock market represents 2.2% of the overall market share. And yet, the average returns of the UK market (adjusted for inflation) have been 6.1%, compared to the 7.5% per cent annual growth of the global market.
Despite the higher gains in the global market, UK investors typically allocate 35% of their portfolio to UK stocks according to Vanguard. Historically this has cost UK investors -1.4% per annum. Navigate Portfolios have benefitted from the “global premium” by limiting our UK weighting to 2.2%.
US presidents have no direct control over the stock market either. While the president influences fiscal policy to varying degrees, Congress ultimately creates the federal budget. More importantly, government spending is only one of many variables that affect the stock market.
Consider events like the dot-com bubble, the Great Recession, and the COVID-19 pandemic. No president or prime minister caused those events, but all three events caused significant stock market volatility.
The impact of any elected party, whether Labour / Conservative or Democrat / Republican is much less significant when you look at the whole data set for the global stock market.
The average return of the global stock market, adjusted for inflation, has been 8% on average. Whichever party has been in power.
So, the best strategy is to hold a highly diversified, global portfolio and check your annualised growth each year. History shows that long-term investors who stay the course are eventually rewarded, whichever way the political winds blow.
Image credit: iStock
An initial conversation, at no cost to you.
