How we’re planning to navigate the choppy waters ahead
It looks set to be an ‘interesting’ week ahead.
As things stand, Theresa May is pressing ahead with the meaningful vote on her Brexit deal in the House of Commons tomorrow.
As things stand, she has nowhere near the support needed to win this vote.
Reports over the weekend suggest a series of phone calls between the Prime Minster and EU27 leaders, asking them to reconsider the terms of deal (as they relate to the Irish border backstop) in the event the vote tomorrow is lost.
We’ve also this morning had confirmation from the European Court of Justice that the UK can unilaterally withdrew its Article 50 notice and effectively cancel Brexit, without seeking approval from other EU countries.
This ruling, coming just the day before the meaningful vote, seems likely to increase the likelihood of a lost vote.
We can’t know for sure what is going to happen next.
One possible scenario is a lost vote tomorrow followed on Wednesday morning by the resignation of Theresa May, and then a new leadership election within the Conservative Party; possibly even a General Election in the New Year.
We do know that investment markets dislike uncertainty.
As we move ever closer to the 29th March departure date, that uncertainty only grows.
With global stock markets already displaying some volatility in recent months, due to US and China trade war and, more recently, inverted yield curve in the US, that growing uncertainty could result in greater volatility, market corrections and (understandably) nervous investors.
During our weekly team meeting this morning, we spent some time discussing these issues and agreeing on how we will navigate any choppy market conditions ahead.
In simple terms, our approach towards investment advice and management remains unchanged. Here’s why.
The portfolios we recommend for clients are well diversified. This means that we don’t recommend putting all of your eggs in one basket, instead spreading portfolios across several investment asset classes, sectors and themes.
This diversification is a really important aspect of risk management when investing money.
From the perspective of any Brexit induced volatility, diversification means our clients are not overly exposed to investment assets which are most likely to respond to domestic turmoil.
It means that, when the newspapers and newsreaders are screaming about billions of pounds being wiped off the value of the FTSE 100, this is only one part of your investment portfolio.
In recent years, this diversification within the portfolios we recommend and manage has moved further from the UK to include a higher proportion of global assets.
Thinking about the UK equity holdings within client portfolios, there’s an interesting consequence of the high proportion of overseas earnings from FTSE 100 companies, for example.
In the aftermath of the Brexit referendum, many investors were surprised to witness the FTSE 100 rise by more than 10% in three months.
During this time, the weakness of Pound Sterling was boosting the profits of FTSE 100 companies with overseas earnings. Around 70% of FTSE 100 earnings come from outside of the UK, making a weak Pound Sterling beneficial for these companies.
I’m not suggesting that a Brexit meltdown leading to a collapse in the Pound will have the same positive impact on UK equities next time, but it’s worth keeping in mind that things aren’t always as simple as they first seem when it comes to investing money.
Our approach towards investment advice and management also remains unchanged because our clients are long-term investors.
Any increased volatility we experience over the coming days, weeks and months will likely be short-term, having little meaningful impact on the long-term performance of portfolios.
One exception could be where clients are making withdrawals from their portfolios in retirement. But in this case, we allocate a sufficient amount to cash in order to avoid needing to draw down from invested assets during periods of extreme market correction.
Time in not timing
We’re staying the course because we know that attempting to time the investment markets is futile.
When markets are volatile, there’s always a temptation to try and sell before they have fallen to the bottom and then buy again before they rise to the top.
Nobody can do this consistently well. The more likely outcome is selling low before buying high. Do this enough times and you can cause some serious harm to your wealth.
Hearts and heads
With all of this said, we understand that it can be unpleasant to watch investment market volatility and experience falls in the value of your portfolio.
Regardless of how often we remind investors that volatility is a normal part of the long-term investing journey, our heart is bound to overrule our head on occasion, especially when the media does their level best to sensationalize what is going on.
If you’re feeling nervous about investment markets in the wake of the Brexit news this week, talk to us.
Your Financial Planner is always happy to discuss any concerns you have.