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May 28, 2019

Election or no election, mantra remains - invest in equity forlong term

The last couple of months saw the country in grip of election fever, the resultant chills were all-pervasive and felt through the fabric of the country. The financial market was no exception. Nervousness was evident specifically in the equity market. Benchmark S&P BSE Sensex index rallied ~8% in March and after a tumultuous couple of months has closed at ~2% since then1. While the elections are over and the country has got a majority government at the center, here’s a word of advise for equity investors – shrug off emotions and stay invested over the long term to create wealth. Short-term volatility in equities is par for the course, election or no election.


A glimpse of the past


Current volatility in the equity market should not be a surprise. History reveals that previously, too, elections triggered sharp fluctuations in the short term of up to a year.


Mantra - Stay invested for the long term


Short-term anxieties apart, investors should stay focused and invested for the long term because equity has the potential to create wealth in the long term. In the following chart depicting S&P BSE Sensex’s growth since its inception in 1979, we have highlighted few negative biases that impacted the market, but despite that the market reported positive growth in the long term.


Further, by investing for the long term, investors increase the chances of optimising returns and reducing risks. For instance, the S&P BSE Sensex has returned average 21% for one year daily rolling return period since its inception in 1979 till May 24, 2019, however this is the average, which also includes periods when investors have suffered losses, and this loss probability (count of negative returns / total number of returns) is as high as 28% in this short holding period. However, as the investment period increases, we see stability of average returns, and a sharp reduction in probability of loss with zero percentage of loss in holding period of 12-15 year rolling basis. This showcases the essentiality of investors not getting impacted by short term events, and rather focusing on generating returns over the long term.