'Wrong course of action' to make portfolio changes as a result of election

Brits will be heading to the polls tomorrow (July 4) but SJP has revealed in the run up to the vote, investors plan to change their asset allocation, withdraw funds, make additional investment and diversify across geographies. 

Novice investors, who have been investing for less than a year, are three times more likely to react to the event compared to those who have been investing for over a decade.

Wiggins said: “As humans we are psychologically wired to focus on things that are salient and the current focus of our attention, and this can be incredibly dangerous for investors, leading us to make poor short-term decisions that are often at odds with our long-term goals. 

“Elections are a prime example of this type of scenario because of the scale of coverage they receive. Not only this, but elections are always about the potential for change, and it is tempting for investors to believe that because something in the economy is changing then so must their investments.”

Out of those taking action, 25 per cent intend to increase exposure to equities, 22 per cent to bonds while 24 per cent plan to diversify internationally by reducing their UK investments.

However, Wiggins urged against making changes as a result of the election, suggesting it was the “wrong course of action”.

He explained: “There are two reasons for this: First, over time for investors the implications of any given event, such as an election, is minimal – it will matter far less than we think it will.

"Second, even if the election were to have a profound impact on financial markets, accurately predicting what that will be is fiendishly difficult and very few people get such forecasts consistently right. 

“The most successful long-term investors tend to be those who have the discipline to focus on their long-term objectives and ignore short-term noise.”

SJP’s analysis of UK market performance data spanning the past 10 UK elections, from 1987, found no clear trends between election outcome and market performance.

The performance prior to, immediately post, and over the duration of each government’s term was on average positive with a very wide range, according to SJP.

It’s findings suggest that major external shocks, such as the 1987 stock market crash, the burst of the dot-com bubble in 2000 and the 2007 financial crisis, have more of an impact in the short term than any political party, with only one government having a negative absolute return over their term, coinciding with the dotcom crash.

Wiggins said in truth very little would change in terms of the conversations advisers are having with clients in the short term.

“Even with political parties having published their manifestos and declaring their plans, so many decisions remain unmade for now.  In reality, it won't be until the King's Speech and the next Budget that we'll get any real clarity over the changes that are to come.

“In terms of investing, advisers should be communicating to clients that it’s never a good idea to react to short-term noise and speculation or unknowns, when following a longer-term financial planning and investment strategy.

"They should be advising against short-term trading or trying to 'time' the markets,” he added.

Areas of concern for clients    

Wiggins believed those clients with non-dom tax status were likely to be concerned with Labour’s proposals to remove their tax-exempt status. 

He said: “The introduction of VAT on private school fees, should we see a Labour government in power, will also have an impact on some parents.

“Higher net worth clients will no doubt be interested in the closing of the private equity carried interest route and the speculation that wealth taxes may be subject to change.

“The speculation around pensions – what will any party do – is also triggering lots of questions and certainly an area of interest for many in the retirement space.”

Wiggins also pointed out that when it came to tax all changes had pros and cons with some tax levers harder to pull than others.

“If there were any changes to investment taxes, it is more likely to include cuts to reliefs rather than increasing headline rates. But challenges remain.

"For example, reducing reliefs on pension taxes may raise revenue, but if they disincentive retirement saving, that could have significant unintended consequences for society,” he added.

alina.khan@ft.com