And so we’re about to enter October — a month that’s seen more of the biggest stock market falls than any other since the 1980s. This year, for added fun, we have the culmination of Brexit. Yes, by hook or by crook, deal or no deal, Boris Johnson seems determined the UK will leave the European Union on Halloween.
Regardless of whether you agree with his strategy or not, it’s clear whatever shenanigans we witness in the political world over the next month is going to have some kind of impact (good or bad) on your portfolio. With this in mind, here’s how I think investors should prepare.
1. Ditch the crystal ball
It is, of course, hugely tempting to try and predict what’s going to happen and adjust your portfolio accordingly. However, if the last three years have taught us anything, it’s that no one knows exactly how this period of political turmoil will end. Our current prime minister might even be gone before 31 October.
This being the case, it’s therefore important to hold investments you’d be happy to stick with for the long term and match your risk tolerance, regardless of any short-term volatility. Leave the high-stakes, might-just-make-a-profit-if-I-time-this-right behaviour to the traders.
It’s also worth remembering a resolution to Brexit will simply leave a space for some other event or issue to take its place. There will always be something else for markets to worry about.
2. If in doubt… drip
Having accepted no one knows what’s coming next, it can still be tempting — albeit counterproductive from an investment perspective — to wait until we know for sure.
As legendary fund manager Peter Lynch once remarked: “Far more money has been lost by investors in preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” The same will surely apply to Brexit.
All stock market journeys are uncertain and it’s for this reason shares give far better returns than any other asset class over time. We’re rewarded for taking more risk than if we’d simply held our savings in cash (not recommended, thanks to the eroding power of inflation).
This is why drip-feeding money into your existing holdings — or ‘pound cost averaging’ in market lingo — will help avoid investment paralysis. It may feel counter-intuitive, but the message here is simply… keep calm and carry on.
3. Buy the world
There’s a tendency for investors to stick with what they know. That’s understandable considering we may use a company’s products or services on a daily basis, or know more about an economy if we actually contribute to it. Failing to ensure your holdings are geographically diversified, however, can be problematic if the companies or country you’re invested in enter a prolonged sticky patch.
It’s for this reason I’d recommend having exposure to markets other than the UK. This isn’t about attempting to jump in and out of investments to reap maximum profit. It’s about allocating your capital prudently so your portfolio remains stable and you can sleep at night.
Aside from moving some of your cash into economies that couldn’t care less about Brexit, it’s also worth contemplating whether you’re sufficiently invested in assets that, while unlikely to outperform, tend to be less correlated with shares (e.g. bonds, gold).