« Arbitrage Funds vs Fixed Deposits in India: Which is Better? How easy is it to double your portfolio? »

Navigating Election Uncertainty: Should You Sell, Hold, or Buy More Stocks?

Posted on 29 May 2024
Author: Sayan Sircar

Tags: Behaviour ; News

10 mins read
📢Join 2900+ readers on WhatsApp and get new post notifications!

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?

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%)

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

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

Arthgyaan Have vs Needs framework plan bucket-wise

Touching your emergency fund, or taking a loan to invest, are terrible ideas at any point in time.

Also read
Closet indexing: how to avoid funds that do this

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.

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

For resident Indians 🇮🇳:

For NRIs 🇺🇸🇬🇧🇪🇺🇦🇺🇦🇪🇸🇬:

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Previous and next articles:

<p>This article highlights the main differences between arbitrage funds and fixed deposits in India to help investors make the best choice for their financial needs.</p>

Mutual Funds Fixed Deposit

Arbitrage Funds vs Fixed Deposits in India: Which is Better?

This article highlights the main differences between arbitrage funds and fixed deposits in India to help investors make the best choice for their financial needs.

Published: 26 May 2024

5 MIN READ

<p>This article shows you how the growth of your investments, the amount you invest and how fast you grow your income have roles to play in increasing your net worth.</p>

Portfolio Construction

How easy is it to double your portfolio?

This article shows you how the growth of your investments, the amount you invest and how fast you grow your income have roles to play in increasing your net worth.

Published: 2 June 2024

7 MIN READ

Latest articles:

<p>This article discusses the NPS Vatsalya scheme that does not make any sense as a product for anyone even if you plan to invest for your children’s retirement.</p>

Children NPS Budget

NPS Vatsalya: A Gimmicky Product That Should Be Avoided If You Are Serious About Investing For Your Children

This article discusses the NPS Vatsalya scheme that does not make any sense as a product for anyone even if you plan to invest for your children’s retirement.

Published: 26 July 2024

6 MIN READ

<p>This article shows you how debt, international and gold/silver mutual funds will get taxed as per the new capital gains tax declared in the Union Budget 2024.</p>

Budget Mutual Funds Tax

Budget 2024: How will international, debt and gold/silver funds get taxed going forward?

This article shows you how debt, international and gold/silver mutual funds will get taxed as per the new capital gains tax declared in the Union Budget 2024.

Published: 25 July 2024

3 MIN READ

Topics you will like:

Asset Allocation (20) Basics (8) Behaviour (14) Budget (12) Budgeting (12) Calculator (26) Case Study (6) Children (20) Choosing Investments (38) FAQ (13) FIRE (13) Fixed Deposit (9) Gold (22) Health Insurance (6) House Purchase (34) Insurance (17) International Investing (13) Life Stages (2) Loans (22) Market Data (10) Market Movements (20) Mutual Funds (61) NPS (11) NRI (20) News (26) Pension (8) Portfolio Construction (55) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (21) Risk (7) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (70)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.