Are Democrats or Republicans Better Investors?
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The role of values in general, and political values in particular, in shaping investments has been underexplored
Red and Blue Investing: Values and Finance, Harrison Hong and Leonard Kostovetsky, 2012
George Soros (Soros Fund Management), Mitt Romney (Bain Capital), Tom Steyer (Farallon Capital), Paul Singer (Elliott Management), Foster Friess (Friess Associates), Donald Sussman (Paloma Partners), and Robert Mercer (Renaissance Technologies).
These are just a few names on the long list of individuals who made a fortune as investors before becoming key players on America’s political scene. While this list includes both Democrats and Republicans, survey evidence and academic research highlights some important differences between partisans in how they approach investing as well as in the returns they earn on their investments.
66% of Republicans invest in risky assets, compared to only 45% of Democrats
Who Is More Likely to Invest in the Stock Market?
Before choosing which stocks to buy, an individual must first decide whether they are willing to expose their hard-earned savings to the stomach-churning ups and downs of the stock market. This decision to invest in the stock market is critically important for building wealth as the stock market has outperformed lower-risk investments like bank savings accounts or Treasury Bills by an average of 7% per year over the last century. The evidence shows that Republicans, and supporters of right-wing parties overseas, are more likely to participate in the stock market, and earn this large equity premium, than Democrats and other left-wing party supporters.
In a recent paper entitled Left Behind: Presidential Cycles and Partisan Gap in Stock Market Participation, Da Ke reports survey evidence from 1994–2016 showing that 66% of Republicans invest in risky assets, compared to only 45% of Democrats. Much of this gap is due to differences in other demographics, but even after controlling for age, gender, race, education, income, wealth, etc., there remains a difference of 5.5 percentage points. As a result of this participation gap and how it varies over the presidential cycle, the average Republican earns a higher lifetime cumulative return and accumulates wealth faster than the average Democrat. Another paper entitled Stock Market Aversion? Political Preferences and Stock Market Participation that was published in 2011 in the Journal of Financial Economics, showed similar results in Finland, with a typical left-wing voter 17–20% less likely to own stocks than a typical right-wing voter.
What explains this partisan participation gap? Since one’s partisan affiliation is not random, it must be due to differences in attitudes or values that cause certain people to choose one party over the other. One theory is that Republicans, and members of other right-wing parties, are less risk averse than Democrats, although the study from Finland attempts to control for attitudes toward risk. Another explanation is that the left has been more skeptical of capitalism and big business than the right, although this might be changing with the rise of right-wing populism. Whatever the correct explanation, the partisan gap in stock market participation gives Republicans a major leg up in achieving a higher rate of return on their savings.
Verdict: Republicans are more likely than Democrats to invest in risky assets like stocks, leading to faster accumulation of wealth.
Republican-managed mutual funds outperformed Democratic-managed funds by an average of 0.5% per year, a difference which is NOT statistically significant
Who Earns Higher Returns on their Stock Portfolio?
One of the difficulties in comparing investment performance of different groups is that people tend to wear rose-colored glasses when it comes to their own portfolio. In other words, self-reported returns are almost always higher than true returns. However, there are two groups that are required to report their actual returns: fund managers who are managing other people’s money, and members of Congress.
Portfolio Managers
In a 2012 paper entitled Red and Blue Investing: Values and Finance in the Journal of Financial Economics, Harrison Hong and I compare the portfolios of mutual fund managers to learn about partisan differences in approaches to investing. We categorize managers as Republicans or Democrats based on their campaign contributions, which are publicly available. We find that Republican-managed mutual funds outperformed Democratic-managed funds by an average of 0.5% per year, a difference which is not statistically significant. After controlling for differences in portfolio holdings’ characteristics such as firm size, the partisan gap in returns goes away completely. Thus, the (small) difference in performance is due to Republicans’ extra exposure to factors rather than stock-picking skills, akin to the Republicans’ higher returns due to more stock market participation discussed above.
Members of Congress
Members of Congress are required to report their stock trades, and several papers have shown that their access to insider information shows up in higher-than-expected returns on those trades (see graph below). This provided the impetus for the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012, which prohibited Senators and Representatives from trading on information obtained from their official positions. After the passage of this law, the high performance of Congressional investments has mostly gone away.
The evidence on which party’s members are “better” at stock trading is more mixed. In 2020, North Carolina Republican Senator Richard Burr was the target of a criminal investigation for his trading right before the start of the Covid pandemic, although he was not charged. Going beyond anecdotes, one paper found that trades of Democrats in the House of Representatives significantly outperformed those of Republicans, while another paper found that powerful Republicans achieved the highest returns. These two results are not contradictory and they study different periods, but overall, it’s hard to conclude that members of one party are better at taking advantage of their access to private information than the other.
Verdict: No significant gap in portfolio performance
Democrats are more attentive to whether the stocks in their portfolio are consistent with their values
Whose Portfolios are More Socially Responsible?
In addition to comparing returns, we can also examine whether there are differences in the types of companies that Democrats and Republicans choose. Research shows that Democrats are more attentive to whether the stocks in their portfolio are consistent with their values. In the “Red and Blue Investing” paper discussed earlier, we also compare mutual fund allocations to politically-sensitive industries such as tobacco, gun manufacturing, defense contractors, and natural resources firms such as mining and energy. Democratic fund managers significantly under-weight these sectors, as if they were running socially-responsible mutual funds. It is somewhat amusing that there are no partisan differences in portfolio weights of alcohol and casino stocks.
A related 2019 paper in Management Science entitled Do Politicians “Put Their Money Where Their Mouth Is?” Ideology and Portfolio Choice found that more liberal members of Congress hold stocks with higher social responsibility ratings, with environmental performance and employee relations being the two most important qualities. Since these politicians know that their portfolio holdings are public information, it’s impossible to tell if they are buying these stocks for show or because they care that their portfolios align with their values. Interestingly, Democrats are likely sacrificing at least some returns for their values as a 2009 paper found that “sin” stocks have historically generated higher returns (i.e., they are underpriced) because many investors prefer to exclude them from their portfolios.
Verdict: Democrats care more than Republicans about investing in stocks that are consistent with their values.
Conclusion
Many models look at investors as optimizing robots (or blindfolded chimpanzees) but the truth is that our values and beliefs, which determine our political affiliation, also affect our investment decisions, including decisions on which stocks to buy, or whether to invest in stocks at all. The evidence described above suggests that, on average, Republicans earn higher rates of return on their savings than Democrats. It’s not that Republicans have better stock-picking skills, but that they are more likely to invest in riskier assets like stocks, which provide higher returns as compensation for higher risk, and that they are less likely to avoid companies whose products are socially irresponsible. As is often the case, the correct approach depends on why you are investing in the first place.
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