Globally, over 64 countries will be holding elections this year which has led Time magazine to note “2024 is not just an election year. It’s perhaps the election year” as approximately 49% of the world gears up for crucial elections, representing the political fate of more than 4 billion people. Key political and economic countries such as the United States, India, Russia, Taiwan, Britain, the European Union, Mexico, Venezuela, and a multitude of other nations will head to the polls.
Historical data suggests that this political backdrop can contribute to market volatility. However, understanding the underlying dynamics and focusing on what we can control may provide a roadmap for turning crisis into opportunity. In the realm of global uncertainties and challenges, the Chinese symbol for crisis, often associated with danger and opportunity, perfectly encapsulates the essence of navigating through turbulent times.
The Chinese Symbol for Crisis
The Chinese symbol for crisis consists of two characters: 危机 (wēijī). While the first character, “危” (wēi), denotes danger, the second character, “机” (jī), represents opportunity. This duality reflects the idea that within every crisis lies the potential for positive change and growth.
Market Volatility in Election Years
Historically, election years have been accompanied by increased market volatility. Investors often react to the uncertainty surrounding policy changes, potential shifts in economic priorities, and geopolitical implications of election outcomes. A study of past election cycles reveals that financial markets tend to experience heightened fluctuations during these periods.
In the run-up to elections, investors may display cautious behaviour, adjusting portfolios and anticipating policy changes that could impact various industries. Additionally, the market may react sharply to unexpected developments in the political landscape, contributing to short-term volatility.
Controlling the Controllable
While market volatility during election years is a reality, successful investors often emphasize the importance of focusing on factors within their control. Drawing inspiration from the Chinese philosophy of turning crisis into opportunity, here are key strategies for navigating turbulent market conditions:
- Educate Yourself
Knowledge is a powerful tool in navigating market volatility. Appreciate that market volatility not only occurs, but it is also inevitable. Educate yourself about the basics of investing, market dynamics, and the factors that contribute to volatility. Understanding the fundamentals can provide a solid foundation for making informed decisions.
- Define Your Goals and Risk Tolerance
Clearly define your investment goals and assess your risk tolerance. Knowing your financial objectives and how much risk you can comfortably handle helps in creating a well-balanced investment portfolio aligned with your individual circumstances. When investing, risk has become the term colloquially accepted to represent market volatility. Therefore, risk tolerance should be viewed as how much short-term market volatility you can endure without unduly compromising your overall financial health.
- Diversify Your Portfolio
Diversification involves spreading investments across different asset classes, sectors, and geographic regions. A well-diversified portfolio is less susceptible to the impact of a single event or environmental, economic, political, or policy factor. This strategy helps manage risk and minimize the impact of market fluctuations.
- Have a Long-Term Perspective
Since market volatility is often short-term in nature. Having a long-term investment horizon allows you to ride out temporary market downturns. Avoid making impulsive decisions based on short-term market movements and focus on the long-term growth potential of your investments. Typically, if your investment horizon is long-term then short-term market volatility often gives rise to mis-priced assets which can be acquired to create enhanced value over the longer term.
- Create a Solid Investment Plan
Develop a comprehensive investment plan that aligns with your financial goals and risk tolerance. A well-thought-out plan serves as a roadmap during turbulent times, helping you stay disciplined and avoid making emotional decisions in response to market volatility.
- Rebalance Your Portfolio
Periodically review and rebalance your portfolio to ensure that it aligns with your investment strategy. Market fluctuations may cause your asset allocation to deviate from your original plan. Rebalancing involves buying and selling assets to maintain the desired mix, keeping your portfolio in line with your risk tolerance and goals.
- Stay Informed, But Avoid Overreacting
Stay updated on market news and developments but resist the urge to overreact to short-term fluctuations. Avoid making impulsive decisions based on emotions or sensational headlines. A calm and rational approach to market information is essential for sound decision-making. If you are aware of the uncertainty and a general perception that the markets are in a ‘bad’ place, then it will not come as a surprise when your quarterly investment reports show your portfolio has perhaps been very flat or negative over this timeframe. Refer to your goals, investment plan and investment time horizon before deciding if any immediate action is required.
- Have an Emergency Fund
Maintain a sufficient emergency fund to cover living expenses for a few months. This financial cushion provides peace of mind during periods of market uncertainty, reducing the need to make hasty decisions due to unexpected expenses.
- Consult with Financial Professionals
If uncertain about your investment strategy or if market volatility is causing distress, consider seeking advice from financial professionals. Consulting with a qualified, professional financial advisor can provide personalized guidance based on your specific situation and goals.
As the world prepares for significant elections, market participants must acknowledge the inherent volatility that often accompanies such events. The Chinese symbol for crisis serves as a reminder that within every challenge lies an opportunity for growth and positive change. By applying principles of risk management, maintaining a long-term perspective, leaning on professional advice, and adhering to a disciplined investment approach, individuals can navigate market turbulence with resilience and strategic foresight. In these times of uncertainty, controlling the controllable becomes a guiding principle for turning crisis into opportunity.
Have a great day!