Navigating Election Uncertainty: Should You Sell, Hold, or Buy More Stocks?
This article shows you the pros and cons of each approach you can take between today and the General Election Results next week regarding your portfolio.
Navigating Election Uncertainty: Should You Sell, Hold, or Buy More Stocks?
Posted on 29 May 2024
Author: Sayan Sircar
10 mins read
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This article shows you the pros and cons of each approach you can take between today and the General Election Results next week regarding your portfolio.
This article is a part of our detailed article series on Election 2024 and the following market gyrations. Ensure you have read the other parts here:
-
How much return do we expect from the stock market now that the elections are over?
This article uses historical data to estimate returns expected from the stock market post-election.
-
What do you need to make money when the stock market suddenly drops like 4th June 2024?
This article discusses the strategies needed to profit off sudden market falls like that happened on election results day on 4th June 2024.
-
5.93% Fall in the Nifty: What Does Election Result Day Teach Us about Risk in Our Portfolio?
This article talks about the volatility in the stock market on 4th June 2024, which was the day of election results.
📚 Topics covered:
- What will happen to the stock market when the Election results come out?
- Case 1: Do nothing
- Case 2: Buy more now before the markets go up after the results
- Case 3: Sell now before the markets fall up after the results and later buy again
- What are the impacts of market timing decisions?
- Should retail investors do market timing?
What will happen to the stock market when the Election results come out?
No one knows. (We do know now on 4th June: What does the election day teach us about risk in our portfolio?)
Everyone however has an opinion and acts (or does not act) on that opinion. The sum total of all of these actions and inactions will drive the overall market.
In the run-up to a major event like election results, the stock markets have already acted on what the majority think the result will be and then move slightly from that level due to others thinking what happens if the opposite result comes.
In such an uncertain situation, what should you do as a retail investor? There are three potential decisions:
- do nothing and keep investing as per your investment plan
- buy more thinking that the market will go up immediately after the results
- sell your holding thinking that the market will go down immediately after the results allowing you to enter at lower levels
For simplicity, we will assume that you as the investor are mostly concerned with the short-term (1 week to 1 month) movement of the equity market. We will use the Nifty 50 (Price) stock index, investible via index funds, as a proxy for stock markets.
Case 1: Do nothing
Doing nothing is one of the hardest decisions to take especially for investors who actively follow capital markets news or are active consumers of market sentiment from social media.
Only those investors who have a rock-solid investment plan in place will actually wait until the election results are out and then act in one of two basic ways:
- If a large move triggers rebalancing: a sudden equity rally might breach 5% corridors on a 60:40 equity:debt portfolio
- If there is a surplus amount of cash available then deploy that amount opportunistically in the worst-performing asset class (equity, debt, gold etc) immediately after the markets move after the results
For the record, we will note down the market prices of these asset classes for now vs. the evening of election results (4-Jun) and the 1-week and 2-week periods after that date.
| Asset class | Investment | 28May | 04Jun | 11Jun |
|---|---|---|---|---|
| Equity | Nifty 50 | 22,888.15 | 21,884.50 (-4.4%) | 23,264.15 (+1.6%) |
| Debt | CCIL All Sov TRI | 3,891.93 | 3,885.57 (-0.02%) | 3,904.91 (+0.03%) |
| Gold | Gold (999 closing) | 72,291 | 71,969 (-0.04%) | 71,445 (-1.17%) |
Case 2: Buy more now before the markets go up after the results
Buying more now before the market pops is a classic Fear of Missing Out (FOMO) reaction.
If you have FOMO, you need to answer one basic question:
If you are buying more stocks now, where is the money coming from?
If you plan to rotate from debt investments (like debt mutual funds) within your portfolio, you need to be conscious that you are deliberately buying more equity (as a percentage of the total) than your asset allocation allows.
If you are holding cash due for whatever reason, then you need to
- re-evaluate why you are placing a cash drag on your portfolio returns due to holding large amounts of cash
- apply the Arthgyaan have-vs-needs framework to deploy the extra amount as per the requirements of your portfolio
Touching your emergency fund, or taking a loan to invest, are terrible ideas at any point in time.
Related:
Should you take a personal loan to invest in the stock market or mutual funds?
Case 3: Sell now before the markets fall up after the results and later buy again
The sell-now-buy-later-at-low levels plan sounds great on paper. However, you need to make two decisions correctly:
- be right about the market falling
- be able to re-enter at the right moment at a lower level
Since you are selling stocks or mutual funds in this approach, you will of course pay capital gains tax.
There are a few things that must go right with this plan
- You need to sell and have the cash ready before the market starts falling
- You need to watch the market like a hawk at every moment in case it starts moving down and then up
- You need to call the moment where you need to enter before the level exceeds your selling price
What are the impacts of market timing decisions?
The compounding effect of an investing decision is permanent
What this means in simple words is that:
What is the impact of a right prediction?
Decisions can go right when
- you bought something and it went up: a permanent profit vs the case you could have bought something else instead which went down at the same time
- you sold something and it went down: this turned out to be the right decision at that point and with that money you invested in something else that went up
What is the impact of a wrong prediction?
Decisions can go wrong when
- you bought something and it went down: a permanent loss where you could have bought something else instead which went up at the same time
- you sold something and it went up: a permanent loss where you could have simply not done anything
What exactly do you have to predict?
You need to predict three things:
- the direction of the short-term move (up or down) - this is in coin flip territory
- the timing of the short-term move (leading up to the election, after the election) - so is this (50:50 chance)
- the amount of the short-term move (1%, 2%, 5%, 10% etc.) - this is a bit more difficult to call as higher movements are less likely than lower movements but have a higher impact
Therefore the probability of correctly calling a
- down movement up to the election is around 1:4
- up movement post the election is also around 1:4
- and so on
If you are doing a Case 3 (sell now and buy later) move, you need to be sure of calling the bottom as well once the markets start recovering. This is not easy.
How much capital should you trade?
The last bit that you need to decide is how much capital, either as a percentage of your total portfolio you will move based on all this decision-making.
If it is a small amount, say 5-10% then the impact, whether you are right or not, will not be substantial.
If it is a big amount, say 20-50% then the potential impact, both for the right and wrong call, will be large. Do you feel confident about that?
Should retail investors do market timing?
Ultimately it comes to the individual investor and their mental makeup:
- do you follow market sentiments or tune out financial media as noise
- do you look at your portfolio regularly or once/twice a year
- do invest based on financial planning or with intuition
There is a lot of academic literature out there with studies showing that market timing is something that retail investors, you and me basically, should not do. There is a high chance of the decision going wrong.
Related Articles
- How much return do we expect from the stock market now that the elections are over?
- 5.93% Fall in the Nifty: What Does Election Result Day Teach Us about Risk in Our Portfolio?
- What do you need to make money when the stock market suddenly drops like 4th June 2024?
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