Opinion | Markets cheer exit poll result with a 3.75% jump. How are you feeling?

Markets are bi-polar in the short term. Manic one moment and depressive the other

Ahead of an event, we were gathered in the 25th floor office of the chairman, in the iconic Bombay Stock Exchange building. A building you enter after paying obeisance to the five foot high, eight foot long, one tonne raging bull stationed at the entrance to the building. A group of fund managers, mutual fund CEOs, intermediaries and I, the outsider from Delhi, are hanging around waiting for the event to begin. The talk, four days before the exit poll, was of course on the results. A straw poll around the room yields a base line 230 seats to the BJP and the possibility of a stand-alone majority government again. And what happens to the market? A 10% jump is not unexpected if the BJP gets a clear majority—markets like stability and continuity—say some of the fund managers present.

The exit poll results that point to a clear BJP victory has bumped the market up almost 4% by the end of the trading day on Monday, May 20. The Sensex closed at 39,352.67, up more than 1,400 points in one day. Depending on the final result, the short-term impact on the market is likely be positive if the results are consistent with the exit poll results. Stock markets are sentiment driven in the short-term and react to news by going up or down. If the market likes an event—for example a clear BJP victory in 2014 or in 2019—it goes up. But if it dislikes an event, it throws a big tantrum. On May 17 2004, the Sensex saw its second biggest ever one-day fall when it lost a bit more than 11% on a single trading day. Circuit filters were used twice in the day as the market roared its disapproval of left-supported Congress-lead United Progressive Alliance taking over from the Vajpayee government. Markets were particulary unhappy with the “markets can go to hell" comment about the markets that Left leaders gave to the media. But the short-term temper tantrum got reversed soon enough and the markets took off from the middle of the year as if on fire. One of the biggest bull runs in the history of Indian markets began from 2004 before the 2008 collapse due to the financial crisis.

Markets are short-term manic or depressive and you could be reacting in two ways to the current market uptick. Agony of having pulled out a couple of months back not wanting to take the risk of a big market event if the poll results showed a hung parliament. Or the ecstasy of being fully invested and seeing your portfolio go up. For retail investors like you and I, it is best to ignore the temper tantrums or the manic highs that the stock index goes through when it reacts to news. You took a tactical call when you pulled out of the market in February; so don’t waste time in regret. To return to the market, go back to your older asset allocation (or a new one if you have had a rethink). You will have no option but to make chunky investments over the next six months to soak up the money you had pulled out. Investors like you who rushed from equity funds to debt funds lost twice as the debt funds had their own crisis that saw returns turn negative in a category hitherto seen as safe.

The lesson to learn from trying to time the market is simply this—it makes sense for speculators and very high net worth investors who have fund managers of their own to take tactical calls. For the rest of us, a fill it, shut it, and forget it strategy works the best. Remember that as long as you are in a growing economy with profit-making growing companies that are listed on the stock market and you are either invested in a broad market index fund or a well-chosen portfolio of managed funds, there is little downside for a holding period of five to seven years.

Investors in equity funds who have been advised well, have continued to pour in money into the systematic investment plans. That is the one category of investors into markets who are zen about the market tantrums. Get into a systematic plan now. That’s the only way to build long term wealth without losing your mind over short term manic depressive market indices.

Monika Halan is Consulting Editor at Mint and writes on household finance, policy and regulation

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