Jun 24, 2016 | JONATHAN ELSIGOOD
So the UK has voted to leave the EU. In consequence, the Prime Minister is set to leave office in October and the markets, not surprisingly, have a bout of the jitters. Further market gyrations over the coming weeks and months is to be expected.
Donald Rumsfeld would say there are many ‘known unknowns’. We face an uncertain process of how and when we exit the EU; an increased likelihood of another Scottish referendum; changes to political leadership in the UK and the knowledge that broad change is upon us.
Whilst it’s natural to be concerned about the markets’ reactions, long term investors should try to view day to day market movements as short term noise. Movements in capital markets can’t be controlled, so instead at times like this it’s important to focus on the matters you can control, such as the structure of your investment portfolio.
In our blog of 14th June – Brexit….keep calm and carry on! – we addressed the short term market risks to leaving the EU. Set out below are the key points we mentioned to mitigating some or all of these risks.
A well-diversified portfolio with exposure to other developed equity markets and emerging markets, economies and companies will help smooth the impact, despite the short term volatility. It’s worth bearing in mind that the UK economy represents less than 5% of global economic growth. In addition, UK market exposure is dominated by the largest companies which make up the FTSE 100 Index, with 70% of their earnings coming from overseas.
We have seen a big fall in Sterling against the US dollar and the Euro. Ironically, this fall is beneficial to a portfolio which owns non-Sterling denominated overseas assets. This is an example of good diversification in action.
Owning short-dated, high quality bonds, diversified on a global basis should deliver reasonable defence against equity market volatility. At times of market uncertainty, money tends to flood from risky assets (equities and low quality corporate bonds) into high quality government bonds, driving prices up. We have already seen early signs of this happening in the major bond markets.
Long term investors who own a well structured, globally diversified portfolio of assets, should maintain faith in their portfolio, remain invested and resist the urge to look at its value too often. Long term means long term, so try not to worry about any short-term falls; that is the nature of investing.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 14 August 19. You are recommended to seek competent professional advice before taking any action. The value of investments and the income from them can go down as well as up, and you may get back less than you originally invested. Past performance is not a guide to the future. The investments described are not suitable for everyone. This content is not personalised investment advice, and Cooper Parry Wealth can take no responsibility for investment decisions you may make as a result of this information. Tax and estate planning advice are not regulated by the FCA.
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