Political opinions of any kind can seriously reduce your investment returns. Anti-free market sentiment and nationalism are among the most harmful biases, though they are by no means the only ones.
In countries where large portions of the population are staunchly opposed to free market capitalism, and harbor strong prejudices against the rich, levels of stock market investment are far lower than in countries where people feel more positive toward free market policies and wealth. This, of course, has a negative affect on investment returns.
German investors are frequently criticized for the fact that their investment portfolios underweigh listed stocks, with equities accounting for a far smaller proportion of total financial assets (5.6%) than in the United States (22%) but slightly higher than in France (5.2%). The numbers are correct, but according to the Allianz Global Wealth Report 2020, they don’t tell the whole story. German households invested 5.8% of fresh savings over the last six years in the stock market, compared to just 1% over the last three years in France.
In each of these countries, there would certainly seem to be a link between investment behavior and attitudes toward free market capitalism and wealth. The Edelman Trust Barometer, which surveyed 34,000 people in 28 countries, reveals just how widespread distrust of the free market and of the superrich is around the world. Among the survey’s items, the statement that “capitalism as it exists today does more harm than good in the world,” attracted more support in France (69%) than in any other developed country. In Germany, 55% of the survey’s respondents agreed.
In contrast, the 47% who agreed in the United States is 22 percentage points lower than France. These figures agree with the findings of my own study, The Rich in Public Opinion, which showed that social envy is significantly higher in France than it is in the U.S. France registered a social envy coefficient of 1.21, whereas the social envy coefficient in the U.S. is only 0.42. In fact, the coefficient was higher in France than in any other country in my study. It is obvious that people who have extremely negative attitudes toward free market policies and the rich are not likely to think highly of stocks and the stock market.
It is clear that an anti-free market bias can lead to unwise investment decisions. The same can also be said of nationalism. The French are not only socially envious, they are also not all that astute when it comes to diversifying their investment portfolios between domestic and foreign shares. In fact, the small percentage of French investors who actually invest in listed stocks make one of the biggest mistakes any investor can ever make. French investors suffer from a strong “home bias,” as the Allianz study shows. Home bias is the tendency for investors to invest in stocks from companies in their own countries, a longstanding phenomenon that scientists have observed in many countries around the world.
French investors hold only 15% of foreign shares in their stock portfolios, in contrast to German investors who own almost four times as many at 54%. Of course, investors might get lucky and see domestic shares outperform a globally diversified portfolio in any given year. However, long-term studies show that investors who are subject to “home bias” have significant yield disadvantages compared to those who are not. The French are more optimistic about their own nation than Germans are, but when it comes to investing, a strong sense of loyalty to one’s own country can do serious damage.
I have been interested in politics all my life and have very strong political opinions but, when it comes to investment decisions, I put my personal opinions to one side. For example, my views align with a lot of libertarian positions and I am a great admirer of the books of Ludwig von Mises and Friedrich August von Hayek. However, I often find myself disagreeing with people who otherwise share my political views but make the mistake of basing their investment strategies on those views. They raise a series of rational objections to paper money (“fiat money”), but then conclude that this means they should invest their money in crypto “currencies” such as Bitcoin. I use quotation marks around “currencies” here because they are not really currencies at all. There are lots of reasons I don’t like Bitcoin, despite the fact that speculators who entered the market at the right time earned great returns. Nevertheless, I am not a speculator but an investor. My investments are completely apolitical, which has yielded better results for my returns.
My advice, therefore, is this: No matter what political convictions you hold, forget them all when it comes to investing money. Investors who care about the environment should nevertheless steer clear of “green” investments and investors who love their own countries should ignore any patriotic stirrings when they are deciding where to invest. Investors who are put off by free market capitalism should bite the bullet and invest in stocks, while libertarians should nonetheless give Bitcoin a wide berth. You could ignore my advice but only if you are prepared to accept a lower rate of return.
Rainer Zitelmann is a historian, sociologist, and investor. The Cato Institute recently published his book The Rich in Public Opinion.
Original Author: Rainer Zitelmann