Ignore poll impact on markets, stick to asset allocations with milestones for exits

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Updated: May 1, 2019 11:51:32 AM

As an investor, are you looking for trading gains or for creating wealth? Does it really matter what was the Sensex levels and the stock prices before, during and after the elections? It does matter if you are a trader and dealing in derivatives.

A trader who does this activity every single day may have a different take on this.

As the first four phases of the seven-phase general elections for 2019 are over, many investors may have started analysing past stock market trends during poll times. An investor, especially someone who is new to equity investing, will have a few anxious questions.

The questions could be:
— Is this the right time for investing?
— What if the market falls after I invest?
— How much should I invest?
— Should I wait and watch?

Fear of missing out

Our experience shows that these above questions are also asked by investors who have been in the market for years. As the day passes, the Fear Of Missing Out (FOMO) is reflected in investor conversations.

In the year 2019, the BSE Sensex has witnessed a growth of over 8%, contributed mainly by rise in stock prices in March 2019. As an investor, one would like to know what was the returns immediately after the six-month period right after the polls in the previous elections.

Considering the election results of 1999, 2004, 2009 and 2014, the returns delivered in the period immediately after six months of the election results varied from 12% (2004) to 45% (2009). In 2014, the returns generated in six months was 35%. So this looks rosy now. Since the beginning of 1979, the BSE Sensex has delivered an absolute return in excess of 390 times. However, this return has neither been linear nor secular. It has grown in a volatile manner, with highs and lows and also being flat for a considerable period of time.

Creating wealth

As an investor, are you looking for trading gains or for creating wealth? Does it really matter what was the Sensex levels and the stock prices before, during and after the elections? It does matter if you are a trader and dealing in derivatives.

It must not matter if you are an investor and have your asset allocation in place. Let us look at the BSE Sensex data since 2002, over a three-year rolling period. The returns varied form -0.89% (2007-09) to 57.75% (2004-06),with a median of 17.32% ( 2013-15). This wide divergence over the longer time frame and the BSE Sensex in 2002 has moved from 3300 levels to over 38000 levels in March 19, and currently at levels over 39,000.

For the period March 16-19, 2019, the one-year rolling return of the BSE Sensex is in double digits. But, majority of the individual investors are noticing that their portfolio is in red or the returns are in low single digits. The BSE Sensex reflects the stock price movement of the top 30 stocks in the indicies whereas an individual investors portfolio may also have stock holdings beyond the indice’s stock.

Event-based investing

Event based investing can be considered for around 10% of the portfolio corpus and should be looked at purely as a situational allocation with a strict stop loss if you are an investor. A trader who does this activity every single day may have a different take on this.

India is a growing economy and is expected to become a $5-trillion economy, double the current size in the next five to seven years, or even sooner. Those who started investing in the early 1990s or even the early 2000s, did not expect the indicies to be at the levels they are today.

As an investor one should not look at event-based investing for the growth of the portfolio. Events come and go. The method to be adopted is simple—asset allocation with milestones for exit/withdrawal, based on goals and liquidity for the investments.

(The writer is managing partner, BellWether Advisors LLP)

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