So it is ‘leave’
The UK woke up on Friday to a vote to leave the EU, the Prime Minister is set to leave office in October and the markets are suffering a bout of jitters.
We are simply seeing the markets at work, and it is likely that there will be some market gyrations over the coming weeks and months, but we should all remember to view it as short-term noise.
As individuals, might I suggest that we need to try not to worry about things that we can’t control. Instead, we should focus on things that we can control such as the structure of our investment portfolios.
I expect that you will remember me saying many times in the past, your portfolio is well positioned to weather this type of storm, both in its structure and in the high quality funds that we recommended to execute your portfolio strategy with. To reiterate:
Your portfolio is global diversified in terms of its equity exposure
It is worth remembering that the UK economy represents less than 5% of global GDP, and its equity market is around 6% of global market capitalisation. The stock market is also not a direct proxy for the UK economy as many of its constituents have considerable overseas operations, such as HSBC and Shell. In fact, around 70% of earnings from FTSE 100 companies come from overseas.
Your portfolio has well-diversified exposure to lots of other developed equity markets around the world, and emerging markets economies and companies, which will help to mitigate any UK-specific market fall. Stockmarkets as a whole might be volatile, but that is the nature of equity investing, and being diversified will help.
A fall in Sterling is actually beneficial to portfolio performance!
Friday saw a big fall in Sterling against the US dollar and the Euro. Ironically, this fall is actually beneficial to your portfolio as the non-Sterling denominated overseas shares that you own are now worth more in Sterling terms. That is an example of good diversification in action.
Owning short-dated, high quality global bonds delivers strong defensive qualities
The primary defensive assets in your portfolio are short-dated, high quality bonds, diversified on a global basis.
I often use the analogy that these are the massive “oil tankers” in your portfolio (as opposed to the wee “speed boats” that equate to the shares, or equity, portion). At times of market uncertainty, money tends to rush across from more risky assets (shares and low quality bonds) into high quality bonds, driving up the value of the bonds portion. We have already seen early signs of this happening in the major bond markets.
To continue the boat analogy, when a severe storm hits at sea, this is one of these times when it’s great to be in the oil tanker rather than the speedboat!
As in the past, my message to you is to have faith in your portfolio and resist the urge to look at its value too often. You don’t need this money today or tomorrow, so try not to worry about any short-term falls; that is the nature of investing. We will continue to adopt a long-term strategy to meet your long-term goals.