The campaign noise coupled with stock market warnings and predictions, in fact, occasionally affect the perceptions of the economy and how well it performs.
Election years can trigger probability neglect, a powerful cognitive bias that causes us to concentrate on the worst-case scenario rather than the most likely outcome.
It is the election year in Kenya and as usual, many investors may be feeling a little uneasy about what is going to happen to their investment portfolio. Investors are often afraid of the volatility an election year brings, fearing it will end up being a down year for their portfolio.
The campaign noise coupled with stock market warnings and predictions, in fact, occasionally affect the perceptions of the economy and how well it performs.
It is however important to remember that how well stocks perform during an election year has more to do with the general economic climate. Therefore, when the stock market is performing well, it is usually a function of a growing economy.
History has shown that unless there is a recession to blame or political upheaval, which would directly impact the economy negatively, the stock market returns become only slightly weaker than normal during an election year and often return to normal shortly after the election.
To put this into perspective, the NSE All Share Index, which tracks the market capitalisation of all companies listed on the Nairobi Securities Exchange #ticker:NSE stood at 136.7 points in 2013 and at 171.2 points in 2017.
This compared to 94.86 points in 2012 and 133.3 points in 2016, indicates that the stock market averaged positive performance despite the elections.
Here are some of the things to do (and not do) with your investments in an election year:
Don't vastly alter your investment strategy
Stick to a long-term investment strategy instead of trying to time the markets around elections. The key is to put aside short-term noise and focus on long-term goals. If you feel you need to do something with your investments before elections, then try to make small changes rather than extreme moves all in or out of stocks.
If you decide to sell some of your stock allocations then try to limit it to a small part of your portfolio. Also, if you make a change now, make sure you have a plan for how and when you will get fully invested again.
Expect volatility, but don't fear it, view it as a potential opportunity
While your ultimate financial plan should never change based on an election, It is important to be aware that volatility tends to be higher and returns tend to be lower in an election year. Volatility is usually associated with shifting opinion polls and campaign stumping that ordinarily intensify market moves.
This may present good buying opportunities for savvy investors, but at the very least it is important to be aware of the chance for higher volatility and prepare for it.
Focus on what you know now rather than trying to predict the future
In times of uncertainty, it can be reassuring to think about what you know. For example, you know that the reason of your investment was to reach a goal that is farther away than the election or that you know there is no sure way to predict the future, and so in order to build wealth, you have to find a way to make your money grow over time with the understanding that it will not be perfect.
It is often said that the least successful times to invest are when it looks like the coast is clear. However, is it ideal that you have a plan that insulates you in up and down markets, and a long-term investment strategy that can help you know what to do when markets change.
Don't allow election predictions to significantly influence investment decisions
History shows that election results have very little impact on long-term returns and that the volatility caused by the election uncertainty is often short-lived. While the stock market certainly experiences bumpy patches in election years, the markets have tended to recover soon after.
Also, most savvy investors already factor in the election risk ahead of time and hence are able to stay on with their investment strategies.
Focus on the most likely outcome, not the worst-case scenario
Election years can trigger probability neglect, a powerful cognitive bias that causes us to concentrate on the worst-case scenario rather than the most likely outcome. This bias makes us feel like we are protecting ourselves from potential dangers ahead, but focusing on our biggest fears can lead to mistakes.
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Note: The results are not exact but very close to the actual.
