Worried about post-election market volatility? Reduce risk with these simple steps

Last Updated on February 12, 2022 at 6:18 pm

As we head to the third phase (out of 7) of Lok Sabha Elections 2019, it should be reasonably clear that it would be a lot tighter race than in 2014. No “single coalition”(!) could get an absolute majority of their own and smaller parties can decide who comes to power. If you are worried about post-election market volatility, you can easily reduce portfolio risk with these simple steps.

Before we begin, do not forget to watch my corporate presentation: Common sense approach to money management!

The short-term stock market volatility index, India Vix is on its way and could reach close to pre-counting levels in 2014. If there is a clear majority, Vix could “crash” (that is a good crash!) and the market would likely move up. If not, it could be an interesting 2019, to say the least! Also see: If BJP loses Lok Sabha Election 2019, will the stock market crash?

As investors, we have three options: (A) React to the developments and reduce equity exposure (but the re-entry point would be unclear) (B) Look only at technical indicators like PE, long term moving averages etc and modify equity exposure (C) adopt goal-based risk management.

The key is to recognise that option (C) does not need A and B; Options A and B make no sense without C in place. So it is a no-brainer that managing risk as per the needs of a goal is all that one needs to do.

If you think this means investing systematically and “staying” investing you are wrong. Goal-based risk management is a combination of passive, systematic investing* and active risk reduction. Of course, I have written about it several times before, but since the site receives new audiences constantly, it helps to reiterate.

* Here systematic investing means investing regularly. This need not be via a “SIP”

What is Goal-based risk management

These steps if implemented sequentially would result in greater focus and success. You can automate most of these steps and create a start to finish financial plan with the freefincal robo advisory template

1. Understand when you need the money. If you are not clear, then you can only save, not, invest
2. Know when to invest in what asset class: equity, fixed income gold etc. Read more: How to define “short term” and “long term”
3. Have reasonable post-tax return expectations from each asset class. For e.g. expecting 18% from equity is silly no matter how long the investment duration is, and how good the portfolio management is.
4. Choose the right asset allocation. This means deciding to hold X% or Y% of equity so that (a) you can tolerate the volatility (b) the amount of money to be invested for this asset allocation is possible and manageable (including future increase investment).
5. Rebalance your portfolio once a year, every year. Market volatility will increase or decrease equity/fixed income percentage holding in the portfolio. Rebalancing is a way to reset the asset allocation to the desired one. See this video for more details

6. Change your asset allocation in a step-wise manner Lot of people say unsubstantiated things like “reduce equity in the last three years, before you need money” and so. You need to reduce equity a lot sooner!  Watch this to find out how it works and why it works.

7. Shift focus from returns to the target corpus. Too much time and effort get wasted on worrying about returns. It is a lot easier if investors focus on the target corpus. This is a variable target due to inflation and other logistics. So each year we need to redo the goal planning calculation.

So each year we need to know how much the current corpus is worth. That is if it is 10% or 20% of the current target etc. This gives us clarity about where we are and what further needs to be done.

Using this method, I have gradually increased my fixed income assets close to the current target corpus for my son’s education. This allows me peace of mind and I can ignore market turbulence.

What about a diversified portfolio?

Notice that I did not mention this above! It is quite important but not as important as the other steps. If you choose just one mutual fund, say the Nifty. That is good-enough diversification across sectors. Most of us have one too many mutual funds! If you are a stock-only investor then you will need to be a lot more careful and focus on diversification.

That is it! These goal-based risk management steps should help you fight not only post-election market volatility but any kind of event-based fear.  The only problem is, are you disciplined enough, focussed enough to follow it? Or will you take what experts on Twitter and TV say?

On top of the above, you can add tactical strategies where equity exposure is varied as per “market conditions”. This is not necessary as shown before although it is possible to time the market: Do we need to time the market?

You can automate most of the above steps and create a start to finish financial plan with the freefincal robo advisory template

What do you intend to do in the coming months?

Watch my corporate presentation: Common sense approach to money management!