By: Michael Allbee, CFP®, Senior Portfolio Manager
“What we’ve got here is failure to communicate. Some men you just can’t reach.”
– Captain (Strother Martin) from the movie “Cool Hand Luke”
Barron’s recently interviewed hedge fund giant Ray Dalio, who manages Bridgewater Associates, the world’s largest hedge fund with around $150 billion in assets. During the interview, he discussed how social division and polarization could lead to some form of domestic civil war and that we are at a critical juncture.
Is Mr. Dalio out of left field? Could we have a constitutional crisis in 2024 similar to the presidential election of 1876? The election of 1876 and the present day have many similarities, with the relentless anger and even hatred building up in our political system. The history of ancient Greece showed that, in a democracy, emotion dominates reason to a greater extent than in any other political system.1
Our democracy is fragile and can only survive if most citizens feel the system is fair and legitimate.2 “Good words and spirit aren’t enough,” Dalio said. “People will have to agree on both how to grow the pie and how to divide it well. That will require revolutionary change.” I don’t know about “revolutionary change”, but bipartisan government and legislation are absolutely essential for the health of our democracy. With an evenly divided Senate and a near-even split in the House, lawmakers have an unprecedented opportunity to truly come together with a plan to restore truth and respect in governance, putting the nation’s business ahead of partisan loyalties. “History bears the scars of our civil wars”, but history also justifies such moderate hopes. “I don’t need your civil war”!3
As we enter mid-year elections, there will be lots of headlines but that should not sway you from following the financial plan we created for you. Of course, elections hold great importance in upholding the U.S. tradition of democratic, representative government. However, their impact on market returns has historically proven to be negligible.4
How do we counter today’s political climate? We focus on the things that we can control. At least when it comes to investing, we focus on diversification, strive to position portfolios to generate stable returns after inflation and taxes, and disciplined rebalancing in times of market volatility to capitalize opportunistically on dislocations. Even though bonds and other “safe haven” assets (i.e., gold, reserve currencies, some alternatives) don’t provide much income today and may face near-term headwinds with rising interest rates, these assets remain a critical component of a diversified portfolio.
References:
- Hart, Liddell B.H. Why Don’t We Learn from History? Sophron, 1944.
- Marks, Howard. The Winds of Change. Oaktree Capital Management, L.P, 2021.
- Guns N’ Roses. “Civil War”. Use Your Illusion II. Universal Music Group, 1991.
- Source: Vanguard, based on data from Global Financial Data as of December 31, 2019. Data represents the 60% GFD US-100 Index and 40% GFD US Bond Index, as calculated by historical data provider Global Financial Data.
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