With the results of June’s snap election some way behind us there continues to be no shortage of speculation about how this will impact the stock market. Below, we explain why investors would be well-served avoiding the temptation to make significant changes to a long-term investment plan based upon these sorts of predictions.

Trying to outguess the market is often a losing game. 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 forecast what is going to happen next. Trying to ‘gain an edge’ by predicting what will happen to the stock market after a general election and whether the incumbent government will be good or bad for stock market returns is pure folly.

Exhibit 1 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 exhibit does not suggest an obvious pattern of long-term stock market performance based upon which party 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, and that investing should be viewed as a long-term endeavour.

Trying to make investment decisions based upon the outcome of elections is unlikely to serve you well (other than through random luck). At worst, such a strategy can lead to costly mistakes and missing out on the positive returns one can expect from simply staying the course in a well-diversified, low-cost portfolio.

INDEX DESCRIPTIONS

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.