Episode Summary
Executive Summary: The episode contrasts two themes: why some highly capable DIY investors still hire advisors, and why the 2024 Trump win should not be read as a signal to time U.S. stocks. The main technical section explains the “presidential puzzle”: U.S. excess stock returns have historically been much higher under Democratic presidents, likely because elections reflect time-varying risk aversion rather than party policy directly. The hosts conclude that diversification and staying invested matter more than political predictions.
Main Topics: Physician Financial Independence conference and DIY investors: Ben and Mark discuss presenting to a large physician DIY-investing community, where many attendees already had strong financial basics but still sought advice for complexity, time constraints, and liability concerns. Why financially literate people still hire advisors: The hosts explain that even capable investors may prefer delegation because personal finance requires constant decisions, changing laws, and emotional discipline; advisory services can function like a retainer for ongoing decision support. The presidential puzzle: Trump, Democrats, and expected returns: The core segment reviews research showing that U.S. equity risk premia have historically been much higher under Democratic presidents than Republican presidents, but argues this is not simple evidence that one party is better for stocks. Risk aversion as the causal mechanism: They summarize Luboš Pastor’s theory that elections are endogenous to market conditions: high risk aversion during crises tends to elect Democrats and also implies higher future expected stock returns; low risk aversion in booms tends to elect Republicans and imply lower expected returns. Why politics should not drive market timing: The hosts emphasize that even if the historical pattern is real, it is too unstable and context-dependent to justify going all-in or shorting U.S. stocks, especially given recent out-of-sample periods and the difficulty of re-entering after selling. Listener reviews and podcast feedback: They briefly discuss mixed reviews, with strong praise for Canadian content and the RESP episode, highlighting that the show serves multiple audiences and topics. After-show discussion: Bitcoin and broader worldview shifts: The conversation ends with informal discussion of Bitcoin, political ideology, and how shifts in regulation and global policy could affect crypto’s legitimacy and adoption.
Key Arguments: Many DIY-focused investors still seek professional advice because they already know the basics but value help with ongoing complexity, changing legislation, and family-level responsibility. Time and attention are scarce even for capable professionals; outsourcing financial decision-making can be rational when personal bandwidth is limited. The historical equity risk premium is not the same as raw stock returns: stocks have generally been positive under both parties, but excess returns over T-bills have differed substantially. The apparent stock-market advantage under Democratic presidents is likely a consequence of high risk aversion and crisis conditions, not proof that Democratic policy directly boosts markets. Electoral outcomes and market conditions are linked through investor/voter sentiment, so correlation should not be mistaken for causation. No historical model is reliable enough to support large market-timing bets; even a good explanatory model can fail badly in an individual presidential term. Diversification and staying invested are the practical takeaways; political events should inform expected return assumptions, not trigger dramatic portfolio shifts. Delegating portfolio management—via asset allocation funds or advisors—can reduce the influence of personal political beliefs on investment decisions.
Data Points: Episode number: 300 (introduced in the opening banter) - The hosts discuss the milestone episode at the start, though the later in-show episode number is referenced as 333 in the transcript content. Physician Financial Independence group membership: north of 30,000 - Describes the size of the Canadian physician and family Facebook community oriented toward DIY investing and planning. Common mistakes identified in Ben’s physician talk: 10 planned, expanded to 12 - Ben says his conference talk on common physician money mistakes ended up including 12 mistakes instead of 10. Historical excess return under Democratic presidents (1927-2015): 10.7% per year - Average market return in excess of three-month T-bills under Democratic presidents in Pastor’s paper. Historical excess return under Republican presidents (1927-2015): -0.2% per year - Average market return in excess of three-month T-bills under Republican presidents in Pastor’s paper. Updated excess return under Democratic presidents (1927-Oct 2024): 10.29% annualized - Ben recalculates the series through October 2024 and finds the Democratic excess-return premium remains very large. Updated excess return under Republican presidents (1927-Oct 2024): 2.23% annualized - Ben recalculates the series through October 2024; the Republican period remains much lower than the Democratic one. Trump first-term equity risk premium: 14.4% annualized - Used as an out-of-sample example showing that historical models do not perfectly predict any single presidency. Biden term equity risk premium through Oct. 2024: 9.12% annualized - Used as another recent comparison point against the historical model. S&P 500 gain after 2016 election through Jan. 2018: north of 30% - The hosts cite an example of a client who sold equities before/after Trump’s election and missed substantial gains. S&P 500 gain over Trump term (2016-2020): 80% in USD terms - Illustrates the cost of selling in reaction to political fear if the investor stayed out of the market. Physician household portfolio exposure in example: ~$5 million invested; 90% fixed income; ~4% U.S. stocks - A conservative client example used to show how emotional selling can still be costly even when equity exposure is relatively small. Conference date: November 2 - They attended the Physician Financial Independence Conference together on this date. Recording date for discussion: November 20 - Ben notes the conversation is being recorded on November 20.
Pivotal Quotes: "The most reasonable way to use that information is in setting your expected return assumptions." — Benjamin Felix: Ben explains that the presidential-puzzle research should influence return expectations, not market-timing behavior. "You have to be right twice. You have to get out at the right time and you have to get back in at the right time." — Mark McGrath: Mark summarizes why selling stocks based on political events is so dangerous and hard to execute successfully. "The causal direction is the key to the paper here." — Benjamin Felix: Ben clarifies that the research argues risk aversion drives both election outcomes and expected returns, not vice versa.
Implications: Listeners should not use election outcomes to time markets. The useful takeaway is that high valuations and low risk aversion imply lower expected U.S. returns, so diversification, discipline, and realistic return assumptions matter more than political bets.
From the Episode
Stocks because those have, I would argue, greater risks. But I think the most reasonable way to use that information is in setting your expected return assumptions. Don't assume the U.S. is going to keep returning 10% a year nominal forever or it's even higher in recent history. Yeah, that's what I think. We'll see. I've said similar stuff at various points in the last 10 years, and the U.S. market has kept going up. You've been wrong before, Ben? Is that what you're saying? I've been wrong so many times on that one anyway. That's a good point. You're not doing anything with your portfolio with this information, are you? No, no, not at all. I don't see how you reasonably could. There's too much uncertainty. And the example of 2016 is such a good one where if you got out of the market, even with the past door model of, hey, expected returns are probably low right now. If you got out of the U.S. market, then you got absolutely wrecked. Even if you got back in under Biden, I mean, you still got some positive returns at least, but you missed out on a huge chunk of the equity risk frame over that period. Well, if it was a perfect model, then there'd be no difference. It could be arbitrage anyway. So it can't be a perfect.
About it this time, but back then we got a lot of calls from people with the exact same sentiment. This is crazy, the market's going to crash. And of course, like you mentioned, it didn't. I think the other really important point in your story, though, is that market timing, you don't just have to be right once. Because even if it had crashed, you have to be right twice. You have to get out at the right time and you have to get back in at the right time. And getting back in, I mean, I've heard stories. I don't have clients that are in this situation, but I've heard stories secondhand from other advisors of clients who got out of the market in the 2000 tech crash and still to this day have not gotten back in. That's just it. And if they were right and it does crash, it's still really, really difficult to get back in because you're at the hard ride edge of this drawdown in the market. You're like, no, it's going lower. So I'm going to wait and wait. And people never want to get in after the crash. They wait until it recovers. And when it bounces back up, you're like, no, this is a dead cat bounce. It's going to drop again. And then it just keeps going up. And then now what? You're handcuffed. You're paralyzed. When do you get back in? So, even if you got it right on the sell, like you said, you have to be right twice. And whether you're right or wrong the first time, it becomes very, very difficult to get back in whether the market does go down.
Because they want to take more business risk. So it does tie into policy to a degree, then, in that they're reacting to external events like what's going on in the economy and the markets in order to make decisions about the policies that they want to vote for. And that has an impact on markets. Yes. But instead of policies causing the stock market to perform a certain way, risk aversion causes certain policies to be favored and causes expect stock returns to vary. So the causal direction is the key to the paper here. And I think what makes it interesting. So the result is what we. See that when Democrats get elected, risk aversion tends to be higher, which leads to higher expected stock returns under Democratic leadership. And when Republicans are elected, risk aversion is lower, leading to lower expected returns under Republicans. Now, an important thing is that in this model, Democratic presidents, they're not the ones causing high expected stock returns. I guess reiterating what we just talked about, but high risk aversion causes both Democratic presidents to get elected and expected stock returns to be high at around the same time. And then it's a similar story under Republicans, just in the opposite direction, I guess. They don't cause
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.