The Real Cost of Partisanship on Your Investments

Image Credit: @lisaluring/Twenty20

In a deeply divided world, it may comfort some that money behaves the same way pretty much everywhere and all the time. Money itself is a neutral actor, which doesn't care how you vote — in theory. But partisanship exists in more places than you'd expect, including your investment portfolio, and it has a measurable effect on your bottom line.

It won't surprise observers that individual investors and money managers have political biases of their own, nor that those biases influence where they put their money. But researchers at San Diego State University and the University of Kansas have unearthed some surprising evidence about what kinds of returns these investments bring. The very short version is that investing with a partisan bent is actually a losing proposition.

After reviewing the investing records and political affiliation of nearly 18,000 money managers and financial executives going back almost 30 years, the researchers found that "mutual funds that have more holdings in politically similar firms tend to perform worse than those with less partisan bias." While the bias toward investing in politically similar funds isn't gigantic, its effect can be sizeable, costing investors losses of between 1 and 5 percent in comparison to nonpartisan investing.

Furthermore, partisan investors tend to sink more of their money (about 43 percent) into firms or funds with similar politics; just about one-third were willing to invest with opposite alignments. Basically, funds with more partisan bias baked in are more volatile, with less return for the risks investors take. Money may be essentially neutral, but the people who use it certainly aren't.