Atul Sethi from Farnam Tree gives his insight.
A Brief Summary:
• Letting political developments and your feelings about them shape your investment decisions can be counterproductive.
• Fundamentals matter more. If you are a long-term investor, your investing lifetime will be far longer than the politician(s) that are making the headlines today.
• If you apply diversification prudently, any political fluctuations will be unlikely to derail the likelihood of success, however you define it.
• For those that make regular investment purchases – like tax-exempt funds in Thailand (SSF, RMF, ESG) – you can use volatility created by political noise to make purchases when prices fall.
Do Not Get Sucked In
Even though politics may have some impact on our lives, it is advantageous to ignore it when navigating your investment life. Letting politics – and commentary around politics – influence how you allocate your investment dollars can be counterproductive for many reasons.
For one, these matters tend to evoke strong emotions. Emotions regularly impair rational decision-making, and this is no exception. Instead, focus on the long-term. Your investment time horizon will be longer than the current politicians you dislike, so do not let them impact your behaviour.
Politics Is Only One Part of The Picture
Even though those in charge may have a say in public policy, there are many other factors that also influence your investments. Investing based on fundamentals of the asset – the company, commodity, etc. – will be influenced more by the actual underlying asset. If you invest in equities, fundamentals such as financial health, management quality and growth prospects will have a larger impact on the value of your investments. Politics can cause short-term volatility, but strong companies tend to perform well over time regardless of political changes.
A well-diversified portfolio is designed to withstand various economic and political scenarios. By ignoring political fluctuations and sticking to a diversified strategy, you can mitigate the risks associated with any single political event.
Focus on What Is Predictable
Political developments are difficult to predict, so do not make decisions based on hunches. Doing so is a recipe for angst, if not inferior performance. The chances that you have information that financial markets do not is small, so there aren’t many arbitrage opportunities (the possibility of profiting from price differences of the same or similar assets in different markets). Markets are generally efficient at incorporating new information, including political news. This means that markets often quickly adjust to political changes, making it challenging to gain an edge by reacting to political events.
Use It to Your Advantage
If you make periodic investments, you can use any volatility caused by politics to your advantage. Markets do not like uncertainty, and usually see heightened selling when there are changes in the political landscape. You can use these windows as opportunities to make your purchases.
Atul Sethi is the founder and CEO of Farnam Tree, a licensed boutique investment firm based in Bangkok. Atul has over twelve years’ experience working in investment banking and as a research analyst, prior to starting Farnam Tree.
