Election and the markets

With the mood of recent state elections and the upcoming 2019 general elections, several questions come up in one’s mind.

Should you make decisions based on the Election Year Market Cycles? Is there some kind of a pattern that can be discerned that investors can take advantage of?

We decided to analyse data for the past 20 years to see whether one should wait for the election to get over before they invest.

The following data shows returns of the Nifty 50 for investors investing 6 months prior to elections vs. investing after the elections.

What does the above data tell us?

There is no real post-election trend. It doesn’t pay much to start investing only after elections. In fact, not being invested prior to the elections could have cost an investor large sums of money.

Staying Invested is the Key

A commonly cited rule of thumb suggests 90% of the market’s absolute return is typically accounted for by the moves of only 10% of the trading days. To illustrate the importance of this concept, the figure below compares the compounded annual price return of the Nifty 50 over the 20 years ended December 2017 to the theoretical results if participation in the market was excluded for just the 10, 20, 30, and 40 best days of this 5000+ trading day period.

An investor who hypothetically remained invested in the Nifty 50 throughout this period would have earned a total annualised return of 11.96%. A notional investment of $100,000 at the beginning of this period would have grown to roughly $1Million. By excluding just the 20 best-performing days in that time period, the compounded annualised return drops to 4.51% and by excluding the 40 best-performing days (still less than 1% of the trading days in the period) the total return becomes negative, eroding the initial investment to barely $70,000.(Investing and the butterfly effect)

Avoid Political Bias

Cut the noise.

Winston Churchill said –

“A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year….and to have the ability afterwards to explain why it didn’t happen.”

Our political opinion may contradict our investing outlook. We tend to make decisions based on our political predictions and divert from the sound and rational process of investing, which may lead to poor portfolio appreciation in the long run. Avoid taking irrational decisions by predicting the outcome.

Historically the best returns have come from uncertain political environments and that the markets have continued to perform irrespective of any political indulgence.

Stay Invested, Despite Volatility

Investing should be a Marathon and not a Sprint.

We sometimes have a hard time separating ourselves from the concerns surrounding potential losses or watching every move the market makes. It is natural to have an emotional reaction to changes in fortune. However, acting on that natural emotion can end up making things worse.

Despite all the events that affect the market, short-term events will not have much of an impact on your ultimate performance if you stay invested by remembering your long term financial goals.