So, the hustings are over, the bunting is down and the UK has voted to leave the EU. The result this morning is that global stock markets have fallen by 5 – 10% at the time of writing. Nervous times.
In our last article ‘This too shall pass.’, we pointed to three risks posed by Brexit:
Risk 1: Greater volatility in the UK (and other) equity market
Risk 2: A fall in Sterling against other currencies
Risk 3: A rise in UK bond yields (and thus a fall in bond prices)
All three risks have materialised in the face of Brexit exactly as we expected, but the three mitigating factors we suggested also still apply and should provide some protection to client portfolios:
Mitigant 1: Global diversification of equity exposure
Mitigant 2: Owning non-Sterling assets and currencies in the growth assets
Mitigant 3: Owning short-dated, high quality and globally diversified bonds
So now is not a time to panic. Indeed, it’s not, in fact, the end of the world after all.
It might also be helpful to remember some key investment principles upon which your investment portfolio with Paradigm Norton is built:
1. Your portfolio is incredibly well diversified and has exposure to high quality short-dated bonds (fixed interest) which will dampen the volatility of your portfolio compared to equity markets alone.
2. The falls in the stock market this morning are matched by an equally sharp fall in the value of Sterling. This means that the international equities you already hold in your portfolio will rise in value when converted back into Sterling for reporting purposes. This will help cushion the impact of falling stock prices on your portfolio valuation.
3. As a long term investor it is inevitable that there will be periods of short term volatility or even shock along the investment journey. Whilst we are not able to predict the timing or the cause of these shocks in advance, we know they happen from time to time, and had this in mind when we agreed the risk profile of your portfolio and agreed the asset allocation accordingly. Today does not change the long term plan.
4. Any fall in value on your portfolio as a result of the referendum is only a paper fall so long as you do not sell. It only becomes a real fall if you liquidate your portfolio.
5. As we have seen time and time again in the past (such as black Wednesday in 1992 and more recently with the global financial crisis), sudden sharp falls in stock markets as a result of an unexpected event or outcome are often followed by some of the strongest one day gains as shock turns to acceptance which prompts action, which restores calm. Missing out on those huge upswings by selling at a time of panic can have a devastating and long lasting impact on your portfolio, and therefore on your long term financial planning.
We know it’s unsettling when markets are very volatile and when there seems to be a lot of fear and uncertainty in the media. We are all emotional human beings and there’s a bit in all of us that feels unsettled and anxious at these times.
However, that’s why we follow a disciplined, evidence based investment approach grounded in academic research and decades of experience in the working of markets, and not a tactical investment approach that makes knee jerk decisions based on our emotional feelings and hunches.
Your Paradigm Norton portfolio has been structured for long term growth with an asset allocation appropriate to your risk tolerance and the achievement of your long term financial planning goals and objectives. Today’s result hasn’t changed that.
We trust and hope this helps to give some perspective on current events and gives you some peace of mind regarding your portfolio. Nevertheless, please feel free to call us if a further chat would be helpful.
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