Don’t Make Jeb Bush’s Mistakes…With Your Investments

March 03, 2016

A couple of weeks ago, former Republican presidential front-runner Jeb Bush tearfully exited the race. The self-described policy wonk’s economic proposals may not have won him the election, but they might actually help him with his investment portfolio. Here were some of his policies during the campaign and how they might apply to his finances:

1) Reduce regulations. One of Bush’s main critiques of the federal government was that it’s regulations add too much red tape and complexity, making it harder for businesses to maneuver. Yet, the same could be said of his investment portfolio. Bush had 20 overlapping mutual funds in his IRA alone, making it harder to manage.

The simplest approach would be to use one fully-diversified fund like a balanced fund that maintains a fixed allocation or a target date fund that automatically becomes more conservative as he approaches his target retirement date. Either could serve as a one-stop shop. If he prefers customizing his own mix, he would still only need a few funds covering large and small cap US stocks, developed and emerging markets international stocks, bonds, cash, and maybe real assets like real estate and commodities.

2) Let the market decide. I once heard a speaker at an investment conference say that there are only two kinds of people who don’t believe in the efficiency of free markets: those who believe in socialism and those who believe in active money management. Bush is definitely no socialist and prefers the efficiency of the free market to top-down command and control style government. That’s why he advocated more market-oriented approaches to health care and energy.

But when it comes to his investments, Bush sang a different tune. He relied on active funds that try to outperform the stock market based on the idea that the market routinely misprices investments. Regardless of what you think of capitalism vs socialism, the track record of active money management isn’t very good. Bush could have instead invested in index funds, which tend to outperform the vast majority of active money managers by simply tracking the market.

3) Reduce taxes. One of Bush’s main policies to spur economic growth was to reduce the burden of taxes on business and investments. However, one interesting exception to this was his proposal to raise taxes on many investment managers by eliminating the “carried interest loophole” that allowed them to pay lower tax rates. This allowed him to claim he wanted to cut taxes on everyone except for some Wall St money managers.

But once again, Bush’s investment strategy told another story. He was smart to shield his investments from taxes in an IRA but by choosing actively managed funds, he exposed his investments to the “tax” of investment fees. These fees can slowly eat into his returns and are one of the main reasons active funds underperform index funds, which typically have much lower costs (including taxes).

Regardless of what you think of Bush’s policy positions, his investment positions leave much to be desired. Of course, Bush is wealthy enough that it probably won’t matter much to his personal financial well-being. But if you can’t say the same for yourself, you may want to avoid making those same mistakes.