Investing after the Brexit vote

The result of the EU referendum vote was obviously not factored into investment markets. To that end, there has been some high volatility across all major asset classes as investors assimilate the potential impact of Brexit and valuations adjust to the new reality.

Sterling has fallen to an historical low against the US Dollar.

Whatever you think about the costs and benefits of leaving the EU it seems clear that the uncertainty is likely to remain for some time and that there will be a substantial temporary economic effect. So what should be your investment choices at this point?

Time in the market, not timing the market

In periods like these, people are tempted to sell their investments and to keep their money safely in the bank. However, although holding cash is the only sensible option for any short-term requirements, over the longer run returns have not kept pace with prices, so its buying power has decreased significantly. The results may take years to become obvious to many, but it’s a different type of risk — call it ‘slow-motion robbery’.

In contrast, history has steadily shown that stock markets tend to increase in value at a rate well above inflation over the long term, thereby increasing your assets. Of course, this growth is far from reliable, with falls in the value of shares occurring on a regular basis.

The idea of buying low and selling high, to take advantage of these variations is therefore highly desirable, yet trying to time buying and selling in this way is laced with difficulty. The market tends to adjust quickly to include any news and so investors often miss out and tie in their losses.

Information from the past 20 years shows the power of long-term investing and the dangers of market scheduling. So, if you had invested in the FTSE All-Share index at the end of December 1995 your investment would have created an overall return of 272%. In comparison, if you had traded in and out, and missing just the 10 best days during the whole period, your return would have been only 102%.

The dangers of ‘home bias’

If the repercussions of the EU vote on investment markets has emphasised anything, it is the importance of diversification. Many investors have a tendency to focus on the familiar: UK shares. But it’s worth noting that the UK represents just 4% of global output and 7% of the world’s stock market value (and recently the UK has been one of the worst performing of all international markets).

There are over 40,000 companies listed on global stock markets, so this sort of bias rules out huge opportunities elsewhere and also opens up investors to localised political and economic risks such as Brexit.

A more varied investment approach, across different regions and types of investment and within each asset class, is much more likely to deliver regular returns. As an example, over six months to the end of June 2016 — a period including the immediate aftermath of the EU referendum — Pilot’s portfolios 4, 5 & 6 (our three mid-risk and therefore most commonly used strategies) delivered returns of +5.9%, +6.9% & +8.2% respectively.

Retain perspective

Markets will no doubt continue to be highly unpredictable in the coming months, but tuning out from the daily news, keeping a long-term vision and a carefully diversified portfolio are the keys to fruitful investing post-referendum…just as before the vote.

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Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice. Past performance is not an indication of future performance.

Article is accurate at date of writing.