The votes are no doubt coming in thick and fast and the start of the laborious counting process is imminent but what will the outcome of today’s General Election mean for investors? As has become glaringly apparent over the past few weeks, since the first of the televised political debates, it’s been anyone’s guess which of the three horses is going to cross the finishing line first. The uncertainty has certainly taken its toll on the markets, albeit not as much as the Greek tragedy. Meanwhile, the main item on the agenda in the lead up to—and, no doubt, beyond—the election has been how the successive government will tackle our debt burden. But while the question for many voters has been “who is most capable of shoring up the UK’s balance sheet?” the questions confused investors have been tackling are “should I do anything different if X party wins?” and “what would a hung parliament mean for my portfolio?”
Politics and Your Portfolio
I can’t answer the first question—though I have my suspicions, despite all three main parties being suitably vague on specific debt-quashing tactics and successfully managing to downplay the sheer impact that such moves will have on the (wo)man in the street. The second and third questions, however, are somewhat simpler: "not really" and "not a lot", respectively.
Clearly such flippant responses are oversimplified but the key message here is that my colleagues at Morningstar have long advocated an investment strategy of buy, hold, and regularly rebalance, and a parliamentary election—no matter how groundbreaking—comes under the heading of ‘market noise’, i.e. something we suggest investors try their hardest to tune out. Of course I can, as can most commentators, offer some party-specific insights into how the policies of the next British government will impact particular investment areas. A win for the ‘City-friendly’ Tories will likely spark a market rally; a clear win for any party could still spark a market rally, out of relief; bond markets will likely favour a Tory outcome; defence stocks could suffer under a Liberal Democrat government, but they’re probably going to suffer somewhat anyway as austerity measures come in. (Furthermore, most large-caps—defence or otherwise—are multinational companies that generate a large proportion, if not most, of their revenues abroad. After all, the UK stock market does not reflect the UK economy.)
The truth of the matter is we don’t know what impact the next government—majority, minority or hung—will have. The crux of the matter is such uncertainty needn’t be a concern.
Investment Principles Still Stand
Much has been made of the fact that the market dropped 18% after the last hung parliament was called in 1974. Putting on my political binoculars and looking beyond the shores of our little island, I see successful multi-party governments in a number of Scandinavian countries, Germany and New Zealand, and I personally see no reason why such a government would be any less able to cut our fiscal deficit than a single-party government. It took 13 years after the crash of 1973-74 before the FTSE 30 (the precursor to the FTSE 100) recovered inflation-adjusted losses—we’ll never know if this could have been achieved any quicker under different governance. But let’s put my political ramblings to one side and focus on what’s really important: whoever emerges the victor after tonight’s count, long-term investors need not rush to react.
If you understand your financial goals, you’ve done your research, you’ve created a portfolio consisting of assets chosen for their fundamentals, you’re well diversified, and you’re investing for the long term, then simply carry on. There’s no need to change your investment principles just because a different—or the same—party is in power. As investors, we spend the vast majority of our ‘careers’ operating in the unknown. Tomorrow will be no different, nor the next day, nor the next. We still need to expect the unexpected, prepare our portfolios for the unknown, tune out market noise and conduct thorough research of investment candidates (or enlist the help of a financial adviser to do so for us), and gradually shift to safer investments such as fixed income as we near our investing horizon, which in most cases can be defined as ‘death’: life doesn’t end at retirement!
Power to the People
Though it could potentially be weeks before we know who will be governing us for the next four years, the election will be over tomorrow. What will last longer is the opportunity that has arisen to educate and equip would-be investors so that the next generation of investors can build on the lessons learned over the past few years. Market crashes come and market crashes go but the financial turmoil that started in late 2007 has left us with a population that has a heightened awareness of economics and the financial system, a desire to have more control over their finances, and a willingness take responsibility for their nest eggs and not leave it up to others. The UK’s first televised election debates have raised even more interesint in all things financial, from individual pensions to global systemic failings.
Investment culture in the UK lags those found elsewhere in Europe or the US. Across the pond, for example, the high cost of further education means that many school-goers are paying regular amounts (thereby taking advantage of dollar-/pound-cost averaging) into various investment pots from an early age and subsequently leave college not only with some nice letters after their names but also equipped with a solid understanding of how to invest their hard-earned cash.
This is a prime time to ensure that the hundreds of thousands of subscribers to company pension schemes in the UK, who opted in but then left their portfolio wallowing in the default fund, have the tools to ensure that they can retire in the style that they dream of and in the meantime can achieve mid-term goals such as buying a property.
For would-be investors, and by way of a reminder for those of us who already do, here are a few principles on which to prepare a portfolio for investment success. This list is by no means exhaustible, and there are just as many pitfalls to avoid as principles to follow, but more information can be found by searching our article archive.
Develop good investing habits:
Understand your financial goals
Spread your risk:
Find the right stock/bond mix
