There is always a temptation to fiddle around with a portfolio’s structure to try to position it for potential short-term global events, such as Brexit. Investors would do well to remind themselves that the core principles of good investing hold... Read more
Blog2nd Dec 2019
There is always a temptation to fiddle around with a portfolio’s structure to try to position it for potential short-term global events, such as Brexit. Investors would do well to remind themselves that the core principles of good investing hold true through all market conditions.
Despite the lack of clarity about what might happen in the global economy and financial markets, we know certain things work to the benefit of sensible investors.
Irrespective of what might happen – including any of the potential permutations of Brexit – as investors we can rely on a number of truths. Markets work pretty well and are hard to beat, so capturing the market return using lower-cost, well-structured products makes good sense. Spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy. Balancing out the risks of equities by owning high quality bonds provides a good insurance policy. Being patient (living through the short-term dips) and being disciplined (maintaining your strategy over time) are fundamental to achieving returns.
Given the short-term uncertainty over Brexit and beyond – let’s focus in on diversification.
There are many ways in which an investor can diversify, from individual securities to sectors, countries and assets classes. A portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK. It is worth remembering that the UK only produces around 3%-4% of global GDP and represents about 5% of global equity market value. Diversifying on a global basis reduces the impact of adverse movements in the UK equity market.
In the event that Sterling is hit hard, as a possible consequence of a chaotic Brexit, it is worth remembering that the overseas equities in portfolios come with the currency exposure linked to those assets. A fall in Sterling will have a positive effect on non-UK assets as the value of these overseas assets buy more Sterling when valued in Sterling terms.
High quality bonds act as an insurance policy against falls in equity markets. Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.
Brexit and the political chaos that we see before us is unsettling for all. We are where we are, unfortunately, whatever one’s Brexit views or political persuasion. Yet there are commonalities in all portfolios such as broad diversification, excellently managed, lower cost products and high quality bonds, that we can all rely on to see us through these times. At AAB Wealth our portfolios are well positioned for whatever lies ahead.