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Strategies

When a Portfolio Is Red or Blue

YOU’RE likely to feel more confident about the economy when your political party is in power. That’s no surprise. But a new study has found that your feelings probably affect the way you invest your stock portfolio.

The study, which has been circulating in academic circles since December, found that when an investor’s favored political party held power in Washington, he or she generally increased holdings of risky stocks, shifted from foreign to domestic companies and traded less often. The opposite occurred when the preferred party was out of office. And the patterns held whether an investor was a Republican or a Democrat.

The study, “Political Climate, Optimism, and Investment Decisions,” focused on investor behavior from 1991 to 2002, a span that included years when each of the major political parties controlled both the White House and Congress. The authors are Yosef Bonaparte, an economics professor at the University of Southern Mississippi; Alok Kumar, a finance professor at the McCombs School of Business at the University of Texas at Austin; and Jeremy Page, a doctoral student at that institution.

Linking individual investment behavior with political preference was tricky. The authors did it by analyzing two sets of data: the information that UBS and the Gallup organization gather each month to calculate the UBS Index of Investor Optimism and the trading histories of more than 60,000 retail investors at a major discount brokerage firm.

To preserve confidentiality, the brokerage firm’s name was not disclosed in the study, and the firm did not divulge the identities of the account holders. But the ZIP code of each investor was provided to the researchers. By analyzing presidential election voting patterns county by county, the researchers determined the likely political preferences of these account holders.

The results were necessarily imprecise, but statistically significant patterns still emerged, the authors said.

One of the primary findings concerned the relationship between investors’ political optimism and their propensity to hold domestic stocks. When their preferred political party came to power, investors tended to become much more upbeat about the economy and the domestic stock market. This, in turn, led them to shift some of their foreign stock holdings to domestic shares.

For example, when Democrats controlled the White House and Congress, Professor Kumar wrote in an e-mail message, “investors in highly Republican counties had a 9 percent larger foreign stake in their stock portfolio than investors in highly Democratic counties.” Just the opposite was the case for Democratic investors when the Republicans were in control.

A similar pattern was evident in holdings of risky stocks, as measured by beta, a standard gauge of portfolio risk (the higher a stock’s beta, the greater its price tends to swing). The research found that when investors’ preferred party was in power, their portfolios’ average beta was 1.3 percent higher than that of investors of the other party.

The researchers don’t take a position on whether these portfolio shifts, in and of themselves, are a good or a bad idea. Their point is that, regardless of the intrinsic merits of any of these shifts, individual attitudes toward them often change with the political climate. In other words, objectivity is rare.

NOW, for example, Democrats and Republicans alike may find it hard to be particularly confident about the economy and the stock market, with unemployment at 10 percent and government deficits swelling. But Democratic investors are still probably more confident than their Republican counterparts, Professor Kumar said, just as the reverse tends to be the pattern when Republicans are in control.

The researchers did detect another pattern, however, that is classically self-destructive: Investors tend to trade more actively when their preferred party is out of power. In an interview, Professor Kumar speculated that this could be traced to reduced confidence about the stock market, which in turn causes investors to shun a buy-and-hold approach.

The researchers found that this more frequent trading resulted in inferior portfolio performance. Primarily for this reason, investors, on average, performed better when their political party was in power — about 2.7 percent better a year.

Dan Ariely, a professor of behavioral economics at the Fuqua School of Business at Duke University, said in an interview that the study’s findings were consistent with what he has found in his research into other kinds of behavior.

“Though you might think that having money on the line provides a strong-enough incentive to keep political biases from affecting one’s investment decisions, it shouldn’t come as a surprise that it doesn’t,” said Professor Ariely, who is also the author of “Predictably Irrational.” “In politics as in other arenas of life, our beliefs exert a powerful influence on the decisions we make.”

These influences don’t affect all investors equally, the study found. More educated and experienced investors were less likely to let their political biases lead to wholesale shifts in portfolios, the researchers said. Presumably, these investors were more aware of the importance of objectivity in investing.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch. E-mail: strategy@nytimes.com.

A version of this article appears in print on  , Section BU, Page 4 of the New York edition with the headline: When a Portfolio Is Red or Blue. Order Reprints | Today’s Paper | Subscribe

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