Many people will have been surprised by the news that awaited them this morning – I certainly was. It doesn’t matter how you voted, it’s still a surprise.
This is democracy in action and, however you feel about it personally, the people have spoken so we all need to deal with the new realities that we face.
The FTSE100 index of the UK’s 100 biggest companies opened down over 8% this morning. Sterling has fallen around 10% against the Dollar, and more against the Euro. As I type, the Prime Minister has just resigned. From an investment perspective, markets always react badly to uncertainty so the falls we have seen so far are not unusual in that regard. It is of course easy to be concerned about such significant short term volatility and I am sure that many investors will be wondering what the impact is likely to be on their portfolios.
At LIFT we believe in the power of diversification – not having all your eggs in one basket, if you like. A good example of diversification in action can be seen in assets this morning - whilst UK stocks have been volatile, assets such as gold and Government bonds have rallied. Our clients generally invest across all of the main asset classes – including UK and international equities, corporate and government bonds, property and alternatives. I am sure that many will think all of their equity holdings are likely to take a hit, however most overseas equity holdings by UK investors will not have their reference currencies hedged. This means that whilst US stocks are likely to open down on the news when the market in the US opens later today, the fact that the dollar has strengthened so much means that UK investment funds investing in US stocks are likely to (ironically) rise significantly today.
The effect of different assets moving in different directions at different times means that a well-diversified portfolio should protect against much of the volatility of UK stocks. We certainly do not have any immediate concerns, or see any need to significantly alter our long term investment portfolios.
We all need to invest money to offset the effect of inflation on our assets and volatility like this is a natural consequence of investment. It has been proven that trying to time markets doesn’t work (certainly not consistently) and therefore our advice is that staying fully invested through market cycles is the right thing to do.
It will clearly take some significant time for the situation to unfold. Our advice is always not to panic in these circumstances. Of course volatility in assets does not necessarily mean that a portfolio has ’lost’ money; you only ever make or lose money when you sell an asset or investment. In investment terms, as long as you don’t sell anything during a time of market weakness you haven’t actually lost anything.
Our financial planners work with their clients to make sure they are rarely in the position of having to sell assets into weak markets – only an unforeseen emergency should mean that is necessary. If you are a client with any concerns, however, please contact your adviser and they will be more than happy to help.