Coping with Brexit uncertainty
5th September 2019
Simon Cole See profile
Financial markets have been turbulent recently and you may have heard that ‘uncertainty’ is the cause.
This suggests that uncertainty comes and goes, but because the future is unpredictable, investors must cope with uncertainty all the time. Consider the Brexit process, the European Elections and the US-China trade talks; not everything goes to plan.
So how can investors learn to cope with the pervasive nature of uncertainty? It can be hard, especially in volatile times when the value of your investments is fluctuating from day to day.
Millions of stock market participants around the world are continually assessing information, its’ expected effect and the impact on prices as investors act on this. It’s therefore reasonable to assume that today’s market level has priced in current uncertainty.
As we know, correctly predicting future events, or how the market will react to them is difficult. The good news is that being a successful investor doesn’t depend on making accurate predictions about the future. It’s important to understand that market volatility is a normal part of investing and to receive the benefit of higher potential returns, investors must be willing to accept uncertainty.
"Being a successful investor doesn’t depend on making accurate predictions about the future"
A key element of a good long-term investment experience is being able to stay with your investment philosophy, even during turbulent times like we are experiencing currently in the UK with Brexit.
A well-thought-out, transparent investment approach can help you to be better prepared to deal with uncertainty and can improve your ability to keep with your plan and, ultimately, to capture the long-term returns available from the capital markets.
Our philosophy comprises three core beliefs and three important practical principles. When we speak to people about investing we base our investment portfolios on a philosophy comprised of three core beliefs and three important practical principles.
Capitalism and markets work effectively:
We believe that capitalism works. Capitalism is reasonably effective at allocating capital to companies, via the markets. Those who take on the risk of enterprise expect adequate return for these risks. We also believe that markets work well. The market mechanism for pricing financial assets does so in a broadly efficient and fair manner, based on supply and demand, as in any market. We expect that the price of a company’s shares should closely reflect the information known about it. Capturing the return of the market becomes the key goal.
Risk and reward go hand in hand:
There are few free lunches in investing. If you need a higher rate of return to achieve your financial goals, you will need to take a higher level of risk in your portfolio. Risk can be viewed in a number of different ways; the volatility of returns (also described as the bumpiness of the investment journey), and the chances of loss, are two commonly used descriptions for risk.
Diversification is a useful tool:
Not putting all of your eggs in one basket is an intuitive and valuable concept. Different types of investments such as equities, property and bonds can help to make the investment journey smoother, without necessarily giving up return. We use diversification broadly in client portfolios, spreading risks across individual securities (equities and bonds), geography, and by investment type.
Focus on the portfolio structure:
Your long-term portfolio structure will dominate your investment journey, so building the right portfolio structure for you is the central focus of our process. Successful investing is about taking on ‘good’ risks that deliver a positive contribution, while avoiding the ‘bad’ risks such as illiquidity, manager risks associated with trying to beat the markets, and opaque and complex product structures. But your portfolio must be suitable for you and your circumstances, so one of our key aims is to ensure that the structure of your portfolio reflects your own individual attitude to investment risk.
Manage costs effectively:
Costs are an important consideration in investment management, as small differences in returns due to costs can have a major impact over the longer term, significantly affecting your future lifestyle choices. Costs come in two forms – financial and emotional – and effectively managing and reducing them can be achieved without taking any risk.
Manage risk tightly:
Rebalancing – having created the right long-term portfolio structure for you, it’s important that your portfolio is not allowed to stray too far from this mix, so we rebalance it back to its original combination of risks on a regular basis.
Product due diligence – before we recommend any ‘best in class’ product, we undertake a full, methodical due diligence review, and continue to closely monitor products on an ongoing basis.
Ongoing governance – our formal Investment Committee meets regularly to review the broad range of risks and investment issues that could impact on client portfolios, and to reaffirm or refine our robust investment processes.
It’s natural to feel unsettled with so much turmoil not only in the UK but globally, so please speak to your adviser or contact Simon Cole if you have any concerns.