As New Zealand Election nears, should investors revisit their portfolio?

Summary

• With the nearing of US and NZ elections, a lot of opinions and predictions are expected to be made on the outcome of the election, resulting in market volatility. 
• Investors must not give too much importance to the outcome of the elections and instead aim at remaining invested for the longer term.
• A good approach comprises investors knowing their risk tolerance and balancing their portfolio appropriately with a blend of stocks and bonds.

Most of the time, it has been witnessed that stock market behaves bullish post the elections on the back of new commitments and policies of the winning party. In 2016, post the surprise win of Trump, the stock market has been upbeat for a considerable time with S&P 500 giving an average return of over 14% during 2017-2019. 

2020 is going to witness presidential race in 2 countries, the US and New Zealand. While US election results are due in early November, elections in NZ will occur in late October. 

This year, in a COVID-19 induced economy, the US and NZ election outcome is quite uncertain. However, agendas are strong with political parties calling for economic recovery post the elections. 

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How are investors placed before elections?

Investors, who had been hit by the massive selling wave that struck the financial markets amid COVID-19, are now bracing themselves with expectation once the election results come out. 

While investment markets should focus on fundamentals like corporate profits and economic growth, investors are often sensitive to market changing event, driving them to make investment decisions out of strong emotions and biases.

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A look at investor’s approach as election nears

Changes to the portfolio should be made on the basis of long-term investments goals

It is quite normal to draw a correlation between the government in control and the influence they may have on markets. However, election years are different. During such times, investors might get tempted to change their portfolio, but they should consider making changes to the portfolio by aligning the same with their long term investment plan as market performance, and election outcomes are full of uncertainty and may turn out to be opposite of expectations.

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Investors should consider fundamentals like corporate profits apart from the economic growth expected post-election outcome

There always remains a question of how share markets get affected by changes in the government. One example is the 2017 elections in New Zealand, where the National Party had won more seats than the Labour party but could not reach the required minimum to govern the system. However, Labour was able to form the party through the support of a minor party, transforming the win from the National to the present Labour government.

In 2020, both the parties in NZ hold a similar view on many issues, and not much difference exists between the stances of both the political parties. However, new reforms would be needed to have any severe impact on businesses, and the share market and such policies can take up many years. 

Hence, though some sectors might gain from the party that wins the election, eventually key drivers of the market come down to earnings of the company, growth, employment and overall global economic milieu. 

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Avoid trying to time the market

Presidential candidates often gain attention to the problems prevailing in the country, and their election campaigns regularly highlight negative messages. This leads investors to be more conservative with their portfolio ahead of elections. 

But timing the market can never be a long-term winning approach and can result in significant problems for portfolio returns. Investors must focus on things that are in their control. Restricting to a sensible long-term investment plan based on investment goals is the best plan that can be pursued by investors.

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Investors must diversify their portfolio

An investor must understand his tolerance for any risk arising from short-term market movements as he/she cannot control the fluctuations in the stock market at any time but can monitor the degree of participation.

A diversified portfolio with a combination of stocks and bonds can help an investor survive in volatile times as something in the portfolio would be gaining at any point in time.

TO KNOW MORE, DO READ: 5 Ways to Diversify Your Investment Portfolio