Can Index Investing Reduce Political Polarization?


Can Index Investing Reduce Political Polarization? (No kidding!)

Are you a principled, disciplined, long term, diversified, index investor? If so, you might find this interesting. (If not, I’d recommend learning about it. These are well understood, very valuable concepts for your financial health.)

(Disclaimer: I’m not an investment adviser and my intention here isn’t really to explain index investing in full detail. Entire bookshelves exist on this topic, and I would highly recommend going through some of them to understand this properly. I am just giving a high-level overview in order to make my point, which I’ll be making imminently.)

One of my personal projects is to find ways of bridging the gap between the left and right. (Yeah, I know, project doomed right from the beginning! But hear me out. You might change your mind.)

(Just to be sure: Politically, I am a moderate who respects both the moderate left and moderate right. I have a left side and a right side, and I need them both to enjoy life.)

Ok, enough disclaimers. What’s all this stuff got to do with index investing?

Well, I am going to connect the idea of index investing, which should be something people on the left as well as the right can agree on, to build a bridge between them!

A typical topic of contention between the two sides is: Why make the rich pay for the health / education of the poor or the environment?

The typical arguments given by the left involve the concepts of social equity, human compassion / kindness, repairing historical harm, and so on. These might sway some people, but, evidently, not many. This is because those concepts are typical left-wing concepts. There needs to be a way to explain this while staying within the bounds of right-wing thinking. Let’s try to do that.

One of the well known / well-accepted ideas in investing is that it is hard to beat the market. Index funds are based on this idea – they basically track an index which represents an entire market.

In addition, to make this really work, you don’t just go for any index, you find the widest, most globally diversified index (or set of indexes) you can find, and then invest in it in a disciplined manner. This allows you to benefit from gains in any market sector, any industry, even any country.

Not only that, but this strategy works only if you have a long term horizon. Various people can beat the market in the short term, but it is nearly impossible to do so over the long term. So you just have to hold on to your investment through the highs and lows of the market, believing confidently, that no matter what the market does on a short term basis, eventually, over the long term, you will do better than most investors. (Again, to understand this better, please read a book that explains the strategy as well as why it works better than any other strategy.)

So, let us say that you are such a principled, disciplined, long term, globally diversified investor. (Congratulations!)

Now, a good investor shouldn’t just invest in something and hope that it will go up. They should really try to do whatever they can to make that investment go up. That would seem like the most logical thing to do, right?

But what can you do to make your globally diversified index fund go up steadily over a long period of time? There are just too many stocks in it, and they are spread across all kinds of industries and countries. You don’t even know the names of most of the companies, leave alone understanding their business, market, management, opportunities, and so on. And that’s perfectly fine with this type of a strategy.

In fact, by definition, the only way your investment goes up is if the underlying index goes up, which means that the entire global market goes up, which means that the global economy goes up! There’s really no other way!

So, a good globally diversified index investor must do whatever they can to make the global economy improve! Not only that, but they must find something that will make the economy steadily improve over the long term. Because if you do something that gets you just a short blip in the economy, those short term investors will bag all those gains and you will be left holding the bag! You simply can’t allow that to happen. In fact, if you really think about it, you want to benefit at their expense!

So you need something that will make the global economy improve over the long term. What are some ideas for doing that?

Think about it. Given that your investment is extremely diversified and you have no clue about its individual parts, investing in the health and education of the poor and young people is one of the best, most leveraged ways to do this. Similarly, given that the environment is global, and really suffering in many areas of the world causing real harm to economies everywhere, improving it also becomes an essential part of improving the global economy. Plus, given that we are talking about long investment horizons here, any serious damage to the environment over the long term can cause serious damage to your portfolio exactly when you need it most – when you are old and retired.

All other ideas you can think of, such as lowering interest rates, cutting taxes, trade wars, cutting benefits, and so on, will only lead to short term blips. Or they may cause an improvement in only some industry sectors or only some parts of the world, at the expense of the others. Basically, only the things that “increase the whole pie steadily over a long period of time” are good for your investment. Those things allow you to benefit at the expense of the short term / undiversified guys.

To conclude, if you are a well off, principled, disciplined, long term, globally diversified index investor, it is imperative that you do whatever you can to invest in the health and education of the young and poor people of the world and our global environment. There’s really no better, more leveraged way.

Globally diversified long term index investing is becoming more and more popular, and for good reason. This implies that many of those investors will do well over time and they may see the benefit of this way of thinking. That gives me great hope that they will see the benefits of taking some of their wealth and investing it in the poor and the young and the environment. Whether they lean to the left or right.