Market impacts of presidential elections

A lot of people are surprised and a bit shocked after last the US election results and while I won’t be discussing the actual results of the election and the fall out (plenty of the media, who were wrong about the election will spend time telling you what will happen), it’s important to know about the market impact.

kiwisaverThe expectation of a Trump presidency would be that the market would react negatively and we are starting to see that (though the DOW was actually up for a bit today, but this could change).

So what does this mean?

Well it means that in the states people are selling shares in companies as they react to the news of the new president and, as more people sell shares, the price drops. This price drop reduces the value of your KiwiSaver units, which results in the cash value of your KiwiSaver (and other managed funds) going down as well.

If you prefer to watch a video on this go here.

The three areas I am going to discuss are:

1. Changing your fund
2. Hedging
3. Historical impact.

Changing your fund:

So should you change your fund to Conservative?

In short no. if you have a longer time period (more than a few years), then you should leave your fund as it is, because markets always recover and the benefits of the drop, will be a positive for you.

If you are about to get your money out of KiwiSaver, then scaling down your fund to a more conservative fund, could be a good idea.

If you have a longer time period, then the benefit of this is that while the funds are down in value, you are buying these shares on a discount. So when they do go up, you will have more units and they will be worth more.

So counter intuitively, it’s the time to buy rather than sell.

To use an analogy, if the housing market drops 20%, would you sell your house or look for bargains to buy more?

Shares and managed funds are no different.

Hedging:

The other thing to think about is that most of the managed fund providers will have been hedging against this (at least one of them we spoke to was planning for this). In very basic terms, downside hedging involves buying a contract that states that at any time until it expires you can sell your shares for a certain value.

So for example, you have some shares worth $10 each, and you take out a contract to be able to still sell them for $10 over the next 90 days. If during this time the share price drops to $8, you can choose to trigger this contract and sell them at $10, rather than $8. And then of course you could use this money to buy them again at the new lower price.

Historical View:

Major events happen all the time, and markets drop all the time. Major events like 9/11, WW2, the dot com crash and many other events will result in the market dropping. But it always rebounds.

On the image below you can see the historical trends of the market overset with the momentous events. As you can see, the market recovers.

graphic-for-investments

So whatever the impact of a Trump presidency, the market will recover, like it always does.

Summary:

If you have any questions on any of this, or want some advice for your KiwiSaver, get in touch with us. And if you know someone not getting advice on their KiwiSaver, get them to give us a call.

By Alan Borthwick

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