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Dan Solin

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Politics and Investing: A Deadly Mix

Posted: 01/17/12 07:03 PM ET

The views of the Republicans running for office are getting a lot of air time. Whatever the relative merits of these candidates, investors might be misled by some of the spirited dialogue.

Two issues stand out as having the potential to lead investors to the wrong conclusion: The accusation that the Obama administration is leading the country towards socialism and the focus on Mitt Romney's very successful career with a private equity firm, Bain Capital.

Let's start with the socialism issue.

The Republican candidates appear united in their view that the massive government rescue operation that took place in 2008 involving the automobile, insurance and bank industries was a mistake. They use the term "socialism" as a pejorative to describe this government activity as an erosion of traditional capitalism and warn investors about the perils of investing in an increasingly socialist economy.

Newt Gingrich stoked the fear of socialism in his book, To Save America: Stopping Obama's Secular-Socialist Machine. Given these views, it is ironic that Gingrich harshly criticizes Romney for his involvement with Bain Capital. Bain Capital was (and is) engaged in classic capitalistic activities.

I am not an advocate for socialism in this country. However, the data tells quite a different story (as it often does!) from the dire consequences implied by the election year rhetoric. According to one report, for the 39 years ending December 31, 2008, the annualized stock returns of "socialist" countries (like Norway, Denmark, Hong Kong, Sweden and France), exceeded the stock returns of the U.S. Unlike the U.S., these countries aggressively curtailed economic freedom. It appears there is an inverse relationship between higher returns and economic freedom. It is also difficult to conclude that government intervention in private industry is a precursor to lower returns.

The spectacular success of Bain Capital, and the vast wealth accumulated by Mitt Romney, has reinforced the view that private equity funds are a ticket to financial success. Again, the reality is quite different.

One study looked at 21 years of returns of limited partnerships who voluntarily reported their returns. It found that, net of fees, returns were roughly equal to the S&P 500 index. Another study found the average returns of the private equity funds it reviewed were 3 percent below the S&P 500 index net of fees.

As a voter, you will engage in fact checking the views of all of the presidential candidates. As an investor, you should follow the same protocol and insist on peer-reviewed evidence supporting the advice given by your broker or financial adviser. Few can survive this kind of scrutiny.


Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

 
 
 

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