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Friday, January 04, 2008

Is Congress the biggest threat to your retirement? 

Yes, at least as long as it is in session. Congress, any Congress, is bad for stocks and therefore bad for anybody who is hoping for share prices to rise.

I stumbled across this fascinating year-old post from Will Franklin, who demonstrates rather graphically that over the last 110 years money invested in stocks only when Congress was not in session would have vastly outperformed money invested only when Congress was in session. The difference in returns is beyond merely startling, and it continued through 2007.

It actually makes sense. Buyers of securities hate uncertainty -- just another word for risk -- and therefore will pay less money for the same security if it bears greater risk. Every day Congress is in session amounts to 535 new opportunities to create new uncertainty, and therefore 535 new opportunities to depress the prices paid for securities. Over the several decades you will save and invest your money, the difference adds up to some very serious coin.


2 Comments:

By Anonymous Anonymous, at Sat Jan 05, 12:42:00 AM:

Does the analysis include transaction costs? I can't tell from the article. Buying and selling every time Congress starts and stops means a lot of transactions that are going to eat up a bunch of your supposed profit.  

By Blogger Georg Felis, at Sat Jan 05, 02:56:00 AM:

I'm just waiting until they say "You know all that money you socked away tax-free for retirement? We've decided to change the meaning of the word 'free'"  

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