Heading for the Brexit – how you can avoid making harmful money mistakes

Heading for the Brexit – how you can avoid making harmful money mistakes

A breakfast television presenter, your dentist, a neighbour, and an oligarch all have one thing in common: they each have an opinion on Brexit.

Anyone can try and guess how Brexit, deal or no deal, will affect financial markets. Or mobile phone roaming, European flights or the shape of bananas. There is understandably a lot of anxiety around the topic right now. A bad outcome could affect people’s lives and livelihoods. However, worrying about how it will affect your well-diversified portfolio, invested for the long run, is an unnecessary and fruitless waste of energy.

It is human nature to try and link market movements to local events like Brexit, as it is to do the same with global events like trade wars, the China slowdown, or what a potentially new domestic government may or may not do.

We have been here many times in one way or another. Evidence shows that there is little correlation between these events and your money, apart from some short-term volatility. The chart below was created by Dimensional. It shows the UK financial history 1970–2017 set against the backdrop of political and economic events, and the government of the day. The chart shows little correlation between the colour of the political party in power and the growth of investment markets. Given that investing is for the long run, it is from this perspective that you need to consider the current situation.

Despite the varied failings of capitalism, belief in its fundamental ability to build wealth should underpin your investment philosophy. The question you must ask is: Will Britain’s exit from the EU  have an impact on global capitalism? This is written on the basis that a People’s Vote fails to keep the UK in the EU. Will Brexit see shares in Google or Amazon collapse? Will Shell or BP, GSK or Vodafone go out of business as a result of Brexit?

Take the Japanese car manufacturer Nissan as an example. The company employs thousands of workers in Sunderland, and a host of other supply jobs are linked to their continued success. If Nissan decides to close the plant, leave the UK and relocate to the EU, thousands of lives in the UK may be badly affected. However, the value of the company may not be affected.

Simply by Googling Nissan, some interesting headlines came up.

28 Feb 2018

Toyota to build a next-generation car in Brexit Britain | Financial Times

21 Apr 2018

Hundreds of Nissan jobs in Sunderland face the axe | Business | The …

4 Oct 2018

Nissan becomes the latest manufacturer to warn against hard Brexit …

In just 8 months the pendulum has swung. However, the social effect and the financial effect are not the same.

Should you sell everything and just hold cash?

If you moved to a 100% cash position, when should this be done and, perhaps more importantly, when should you reinvest? How many ‘safe’ banks would you spread your money across? What after-tax rate of interest could you get?

The answer is that it’s impossible to know. But what Capital do know is that the consequence of getting the timing of such decisions wrong can be catastrophic.

In 2008, some financial pundits advised investors to move to cash and stay out of the markets until things got “back to normal”. Following this advice would have seen investors missing out on significant growth immediately afterwards, in 2009 and 2010.

Changes to your portfolio should only be motivated by the headlines of your life, not the headlines in the news.

During January 2016, a Royal Bank of Scotland analyst predicted a major sell-off in global markets for that year. The press picked this up to sell papers and advertising revenue. It was very effective. But the analyst guessed wrong. And it was a guess.

And you might hear similar ‘advice’ again from ‘talking heads’ on television, or the radio talking of impending financial doom. But before you do anything, please consider the facts below:

  • A globally well-diversified portfolio compiled of multiple asset classes with a tilt towards equities has historically returned between 5% – 8% annually.
  • A Capital portfolio holds between 7,500 and 8,000 of the world’s most successful companies, global commercial properties, and high-quality government bonds.
  • Investors have weathered Blair, Brown, a hung Parliament and coalition, Cameron, the EU referendum, Russian aggression (Georgia and Crimea), corporate fraud in Tesco’s and VW, Chinese stock market falls, GREXIT, German threats to leave the single currency, the Scottish Independence referendum, and the Trump election.
  • One thing is 100% certain, if you move to cash you will lose money because of inflation, and may miss out on market recoveries.
  • And after Brexit, there will be another dark cloud somewhere in the world. That’s what happens.

Brexit per se wasn’t planned, but investors and savers need to consider the consequences. Keep calm, ignore the noise, and focus on what you can control and enjoy.

If you have any concerns at all, please contact Capital and one of our experienced chartered financial planners will be pleased to talk to you.

At Capital, we believe that when the waters get rough, it’s best to stay in a large ship rather than a small boat.

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