Over the long run, the market has provided substantial returns regardless of who lives at Number 10.
Today is Boris Johnson’s first full day as the new Prime Minister and there has been a lot of media coverage of the transfer of power and the potential effects the new appointment will have.
There is a lot of opinion about the political reasons for the new cabinet appointments, but the economic impact of the new PM is still unknown. This of course does not stop the speculation about how the new PM will impact the stock market. Below, we explain why investors would be well-served avoiding temptation to make significant changes to a long term investment plan based upon these sorts of predictions.
Growth of a Pound invested in the Dimensional UK Market Index
January 1956 – December 2016
Past performance is not a guarantee of future results. The index is not available for direct investment, therefore its performance does not reflect the expenses associated with the management of an actual fund.
Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. While unanticipated future events (genuine surprises) may trigger price changes in the future, the nature of these events cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. So, it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after the appointment of a new Prime Minister.
The focus of this new PM election is Britain’s exit from the EU. But, as is often the case, predictions about the outcome and its effect on the stock market focus on which party or leader will be “better for the market” over the long run.
The above graph shows the growth of £1 invested in the UK market over more than 60 years and 12 prime ministers (from Anthony Eden to Theresa May).
This graph does not suggest an obvious pattern of long-term stock market performance based upon which party or leader has the majority in the Commons. What it shows is that over the long run, the market has provided substantial returns regardless of who lives at Number 10.
Equity markets can help investors grow their assets, but investing is a long-term endeavour. Trying to make investment decisions based upon the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely result from random luck. At worst, such a strategy can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.
Dimensional UK Market Index: Compiled by Dimensional from Bloomberg securities data. Market capitalisation-weighted index of all securities in the United Kingdom. Exclusions: REITs and investment companies. The index has been retroactively calculated by Dimensional and did not exist prior to April 2008.