The nation’s balance of power is at stake as both senators from Georgia face runoff elections in early January. The campaigns have been bitter, and they stand to get more so.
But here is one matter that the four candidates agree on, even if some of them have come to it begrudgingly: Owning and trading individual shares of stock has stopped making sense.
One of the two Republican incumbents, Kelly Loeffler, sold all of her stock this year. Her trading in the early days of the pandemic, in the wake of a private Senate briefing, had come under scrutiny. The other, David Perdue, sold all but three stocks after his trades also generated controversy.
Ms. Loeffler’s Democratic challenger, the Rev. Dr. Raphael Warnock, owns only mutual funds and thinks all members of Congress should do the same. Jon Ossoff, the Democrat trying to take Mr. Perdue’s seat, also supports a stock ownership ban and would sell the more than $500,000 of Apple shares he owns if he won.
The potential for the reduction of conflicts of interest, or the appearance of them, is all for the good. But here’s the other thing that many of our 535 elected representatives should learn: Shunning stock trading is a better way to build bigger balances.
I learned this the hard way, albeit with much less money than the senators are playing around with. In 1994, I was in and out of a regional bank stock, but even when a bigger institution bought the company, I didn’t make much more money than I would have in a mutual fund that owned every stock in the market. In the wake of the terrorist attacks in 2001, I bought a stock related to airport security with similarly middling results.
Then, in 2002, I went to work for The Wall Street Journal, where strict rules kept reporters away from any individual securities. In the absence of owning any stock aside from that of the newspaper’s parent company, editors could assign reporters to anything without worrying about conflicts. Hopefully, staff would also steer clear of the temptation to try to trade on information that was about to be in the articles. The New York Times had similar rules when I arrived in 2008, and they remain in place.
It was a relief, frankly. No knock on people who enjoy gambling and trade stocks as a hobby (using only money they can afford to lose), but trying to predict a stock’s performance and outsmart other investors just wasn’t my idea of a good time.
Then, as I learned more on the job about the stock market, I realized how much better my odds of long-term financial security were going to be if I didn’t trade stocks or try to beat the market. Far better to stick to mutual funds that simply owned most or all of a particular market segment.
The evidence is everywhere, and someone ought to spend 15 minutes shoving it under the nose of every member of Congress who shows up in Washington for the first time. Where to start?
Extremely active investors, as Ms. Loeffler and Mr. Perdue were, might begin with the classic 2000 paper “Trading Is Hazardous to Your Wealth,” which used the records of over 66,000 households to show that the annual returns of people who traded the most were 6.5 percentage points lower than the overall market.
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Next, they could move on to what a different set of academics believed was the first-ever analysis of the actual portfolios of members of Congress between 2004 and 2008. It turned out they weren’t great at this investing thing and would have done better in basic index funds. If they had invested $100 that way, they would have ended that harrowing period with $80. Instead, the average member who felt above average ended up with $69.
Stocks bounce around a lot. Past performance is no indication of future success. If you don’t believe it, check out the Stock Pickers chart on the site of a firm called Index Fund Advisors. It re-ranks the performance of 18 household-name stocks over each of 20 years, before your very eyes.
To take this thought further, consider a bit of analysis from Dimensional Fund Advisors: If you examine the entire top 10 percent of stocks each year since 1994, fewer than a fifth, on average, make the top 10 the next year. “Investors with concentrated portfolios may actually miss out on the very stocks that deliver the best of what the market has to offer,” the firm notes.
In fact, according to a different bit of research, the best-performing 4 percent of stocks contributed the stock market’s entire net gain since 1926. Buy index funds, the logic of which is apparent in several research notes on Vanguard’s website, and you’ll get every security that makes up whatever the 4 percent might be for the next 100 years.
So why do so many individuals use other strategies instead? One reason could be ignorance. Or hubris born of the past decade, when stocks have mostly gone up. Also, plenty of people like gambling. And now that companies like Robinhood have lowered the transaction costs of active trading, it’s just so tempting to press one’s luck, especially when you’re bored during a pandemic.
I suspect something else is at work with the Georgia senators. Both denied using inside information they got on the job to inform their trades (and were cleared when investigators looked into it), and both said they had outside advisers trading without their knowledge.
But the success and drive that allowed Ms. Loeffler and Mr. Perdue to succeed in business and gave them the confidence to run for office could easily extend to a wrongheaded investment strategy. If you’re a person who keeps winning in life, it’s tempting to talk yourself into believing you can pick investments that outperform an index fund — or pick advisers who can do so for you, even after you compute the impact of their fees on your returns.
Congress could make this issue go away, and some members have introduced bills that would restrict stock ownership. It could also create or extend workarounds for the newly elected that would make it easier for people like Mr. Ossoff to enter public service and sell a bunch of Apple stock without generating a large tax bill.
But let’s be real. Bills like that aren’t going to be a high priority anytime soon. Better, then, that members of Congress erase any perception of impropriety on their own — and protect their portfolios to boot — by getting out of individual stocks altogether, voluntarily.
I tip my cap to the four candidates in Georgia, to varying degrees, for doing this already or getting close. I look forward to asking every new member of Congress to do the same thing come January.
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