In about nine months, India will be voting to choose its 15th prime minister in the Lok Sabha Elections 2019. It is well known that in the build-up to every general election and immediately afterwards, the market is filled with excessive fear and hope resulting in swings that can unsettle the nerves. So is there way out to handle this†additional volatility? As we shall discuss below,†yes we can and it is a lot simpler than you think. For some proof that the elections make a difference, see:What drives the stock market: GDP? Earnings? Politics? RBI?
First, some perspective is necessary. In my opinion, there are two big misconceptions concerning market volatility and how people respond to it. (1) The fear of loss, the fear of a crash and the risk of pulling out when the market is ‘low’ is considered to be among the biggest behavioural mistakes. I beg to differ. I think it is†regret. The above fears do not pan out on an everyday basis. Regret does.
So what is this regret? It is that feeling that hits you when you see the market fall after your monthly SIP instalment have been credited – oh I missed a dip again. It is the feeling that hits you when the stock you sold zooms up or the funds you exited emerge as “top performers”. You will agree that regret or just the possibility of it is an everyday occurrence in investing.
Regret can destroy the best-laid plans and strategies. When regret comes knocking, you need to say “its all in the game” and not let it in. If you do, you cannot even do simple things like rebalancing a portfolio. Let me give an example. Suppose you find that equity allocation in your portfolio is 70% while you only intended it to be 60%. So you sell stocks or mutual fund units and invest it in fixed income and reset the allocation back to 60%. After you do this, the market zooms up further. If you think “oh I should not have booked profits, it should have gone up to 80%”, it will affect your ability to rebalance again down the line. Regret over such “small things” can destroy your investment strategy (assuming you had one, to begin with). Also, see:†How to Rebalance Your Investment Portfolio
The second aspect is the fear of a crash and a crash itself. A market does not have to crash to give us poor returns. It just needs to swing up and down for a few years to do that. Remember that time is money. So time lost is money lost. A sideways movement is your enemy a few years into investing. See:†How can a 400% profit result only in 8% return?! Hodling to the moon Risk!†However, it is your best friend when you just start. At least it was(is) mine -†Ten Years of Mutual Fund Investing: My Journey and lessons learned
My point is, if you have just started investing, don’t worry about the coming elections or any other event and just invest! This post is not for you. If your financial goals are like 20+ years away, this post is not for you – just invest. This is only for those with a few years of experience under their belt. Now, I am tired of saying (1) have a proper asset allocation in place – how much you will invest in equity and how much in fixed income and (2) have a proper plan to change the asset allocation with time. See:†How to reduce risk in an investment portfolio†Also see:†Deciding on asset allocation for a financial goal†So, I am not going to repeat myself again. The following will not make sense if you don’t have an asset allocation in place. If you want to ensure you start right, try the†Freefincal Robo Advisory Software Template
In fact, stop looking at your profit and loss every day. That is childish. When you open your portfolio tracker, one of the first things that you should see is your equity exposure and fixed income exposure. The following is based on simple common sense and zero expertise. Anyone on an information diet could think this through”
Case 1: I need the money in 2019/2020/2012 (next 3-5Y). Then (a): If the goal is crucial, I stop investing in equity and reduce equity allocation over the next few months to 20% or less. I don’t worry about taxes or exit load or regret. Well, this is what I would do. What you do is up to you (this applies throughout this post). (b) If the goal is flexible then I will continue to invest in equity, but reduce allocation to about 40%, and the decrease it further down the line. Either way, I will not be too concerned with the election outcomes.
Case 2:† I need the money in about 5-10 years from now. (a) High-risk path: I will Rebalance the portfolio right now and ensure equity allocation is 50-60% and not worry about the elections. (b) Lower-risk path: Rebalance now or in the next few months and get equity exposure down to 40%. Wait for election dust to settle down(see below) and then increase equity exposure. Of course, this way, I might escape the sharpest part of a correction or I might miss the profitable part of a rally. Hey, remember – no regrets.
Case 3: I need the money after 10 + years. (a) Medium risk path: Stick to my course and ignore the election build up. (b) Low-risk path: Do as above. Rebalance and reduce equity to 40% and then jack it up. Please note: by low, medium or high risk, I am referring to emotions. I have no idea how these decisions will pan out quantitatively.
Case 4: I need the money after 10+ years. My intended allocation is 60% equity (rest in fixed income) and it is currently only 40% – because I started investing late in equity. Then I would do nothing and stick to my course.
Now that the suggested course of action is done with, let us discuss election possibilities without talking politics.
Case 5: I am on the verge of financial freedom and/or early retirement. Reduce equity exposure to about 40%. Ensure the fixed income component after such reduction is enough to provide inflation-protected income for at least the first 10, preferably 15 years (when you will not be working full-time). Use the robo advisory template to stress test your plan
Lok Sabha Elections 2019: possibilities and market impact
Outcome 1: Clear majority. Does not matter for which party. The market should cheer this outcome. However please note that this does mean legislation (esp concerning corporates) will become easy! It has not been since 2014!
Outcome 2:†Clear majority missed by a narrow margin, but a wide margin between 1st and 2nd place. This also is not too bad and a reasonably strong coalition government is possible
Outcome 3:† What happened in Karnataka.
Outcome 4:† Truly hung assembly.
Outcomes 3 and 4 will not only spike market volatility in the short term, it will also have consequences over the next few years. This is the reason why investors who need money in the next few years should be exercise extreme caution and those who need it within the next ten moderate caution. These decisions are never easy and could go wrong. If they do, we should dust ourselves and move on.
What is my strategy around†Lok Sabha Elections 2019?
Readers may be aware that I have provided updates about my portfolio from time to time. See:†My personal financial audit 2017†and†This is my portfolio vs Sensex, Nifty Next 50: Want to Check yours?†So it is only fair that I discuss what I intend to do in the next few months.
My son’s education & marriage. Started investing for this nearly 9 years ago.† Another 9 years to go for his school graduation. The asset allocation is current ~ 59% equity and the rest in fixed income (see details in the above audit post). Over time, due to periodic rebalancing, the fixed income component is enough for a†current UG degree. So some basic risk management is in place.† So considering all this, I will probably ensure that the equity does not go above 60% in the coming months and hold on to 60% equity. Such goal-based risk management is, imo, an efficient way to ignore all noise about the market (including this post) and reduce risk.
My retirement corpus: This now stands at about 56-57% equity. For my circumstances, as of now, there is no need for any change.
Endnote: Please recognise that the equity reduction mentioned above is only for those who are overcome with fear. If you think no matter how the 2019 Lok Sabha elections play out, the market will eventually reflect economic growth†and if you have the time to wait for such a reflection, go ahead and nothing.
As long as you have a strategy, you dont need to look at what others are thinking/doing. As should be obvious by now,†this is my strategy (besides avoiding regret). Have a good weekend.