Should investors adjust their portfolios based on predictions of election outcomes?

Therefore, it is prudent, although more costly, to build a bridge that is robust enough to withstand conditions far beyond what is anticipated, thereby ensuring its longevity and safety.

Optimization involves tweaking systems to maximize gains or minimize costs. If there is no uncertainty about the future, we should aim for optimization.

However, in the presence of uncertainty, we should favor robustness of the system. This principle of favoring robustness over optimization is crucial across many fields, not just engineering.

In business, supply chain managers might strive to reduce working capital requirements to the bare minimum. While this is aimed at achieving peak efficiency in the short term, over the long term they might leave the system vulnerable to shocks.

Take the recent pandemic as an example: many companies had minimized their inventory and relied heavily on few suppliers to cut costs. This strategy backfired when supply chains were disrupted during Covid, highlighting the dangers of over-optimizing without considering uncertainty.

What does this have to do with investing? Well, this is the exact same dynamic play out when investors construct portfolios without any regard for asset or portfolio allocation.

During election years, investors are tempted to adjust their portfolios based on predictions of , attempting to time the market to maximize returns.

At other times, we often hear the phrase: “If XYZ is giving me so much return why should I invest anywhere else”. XYZ is often the hottest asset class or sector at that particular point of time – Smallcaps right now, pharma during Covid, crypto during crypto boom etc.

In each of these cases, the investor is trying to maximise the returns but we can now see the fallacy in these statements –

1) These statements are often based on trailing returns of the asset class or sector. And trailing returns have little if anything to do with future ,

2) While predicting future events is difficult, predicting the impact of such events on markets is even more difficult. Even if the investor has reasons to be optimistic about future returns of an asset class, such an estimate will have a fair degree of uncertainty.

Investment returns are multiplicative and consequently what matters more in investing is long term survival. A severe drawdown can create a major impact on long term returns.

A portfolio created with the idea of maximizing return without considering risks will be inherently fragile to unanticipated shocks. Instead, the focus should be on creating a robust portfolio that can withstand various market conditions, not just the ones we expect.

(The author is Fund Manager )

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of )