Despite the economic uncertainty around Brexit, investing in stocks is still a great idea. However, it’s important you understand how events like Brexit affect your portfolio, and what steps you can take to offset any fluctuations. So, to help you make smart investment decisions now and in the future, here’s what you need to know.
Brexit and investing
First, let’s be clear on how and why events like Brexit affect the stock market.
Some events, like political changes, affect national and regional economies. They cause things like inflation, unemployment and changing interest rates.
When there’s a clear cause, it’s known as a ‘macroeconomic’ event. So, for example, we can say the US election and the coronavirus pandemic are macroeconomic events. And since Brexit affects various economies around the world, it’s definitely a macroeconomic event. Here’s how share prices may be affected.
- No trade deal could mean sectors like the car industry suffer. If you’re a shareholder, you could see a shortfall.
- If consumer confidence drops, share prices in companies selling luxury and non-essential goods could drop. On the other hand, shares in ‘staple’ and essential goods retailers could rise.
- The FTSE falls whenever no-deal Brexit news circulates.
But why do events like Brexit affect investing? Well, it all comes down to one thing: uncertainty.
Remember, the stock market is all about growth. So if there are concerns over things like high inflation, currency exchange rates and unemployment, some stock prices fluctuate. There’s less appetite for risk, so the market slows. And as we all know, Brexit is riddled with uncertainty. It’ll affect everything from employment to trade, and there’s still the chance of a no-deal exit from the EU.
In other words, it’s pretty obvious why it might affect the stock market and share dealing. But what can we take from this? Does it mean you shouldn’t invest? No – and here’s why.
Diversify your portfolio
Let’s be clear about one thing: there’s no such thing as a ‘safe’ investment. No one gets it right all the time, not even highly successful investors. But what do these investors have in common?
They diversify their portfolios. They invest in assets across different sectors. To make this clearer, here are some specific benefits associated with diverse portfolios:
- Even if one investment fund underperforms, you still have other investments to rely on.
- Diverse portfolios require less maintenance because you’re not constantly worrying about your next move.
- There’s less chance you’ll make knee-jerk reactions to short-term changes.
- You can offset market shocks (such as Brexit investing shocks) affecting a particular sector.
Diverse portfolios are, generally, safer bets for people who don’t have a huge appetite for risk. For example, if you’re a new investor, it might be unwise to put all of your eggs in one basket. If you spread your investment across various assets, there’s a better chance of success in the long run.
And remember, macroeconomic events like Brexit only affect some share prices, not all of them. For example, your overseas investments may improve even if there’s a temporary sterling slump.
Brexit, investing and the long term
So we’ve touched on Brexit, investing and portfolio diversity. Bringing it all together, here’s why long-term investing is the Foolish – not foolish – way to grow your wealth!
- As an investor, a little risk is inevitable. If you jump ship at the first sign of trouble, you won’t give your stocks a chance to recover. A long-term approach to your stocks can mean reaping some rewards when the stocks stabilise.
- The longer you invest, the more you give your money a chance to grow through compound returns.
- Long-term ISAs, like Stocks and Shares ISAs, are sometimes easier to invest in and manage than more complex funds.
- When you invest long term, you’re more likely to spend time researching and picking high-quality investments.
- That said, you can also maybe afford to add in some ‘riskier’ investments with higher potential yields because you’ve built a stable portfolio around them.
It’s a good idea to invest in a blend of UK and overseas stocks to offset Brexit challenges. Just remember you should never use money you can’t afford to lose, because no investment is ever 100% safe.
If you’re new to the investing world and fancy dabbling in some online share dealing, check out our guide to the best share dealing accounts before you start.
As you can see, Brexit and investing aren’t incompatible. You just need to ensure that your portfolio is diverse enough to withstand market challenges.
The main takeaway? Successful investing often comes down to playing the long game. You won’t get it right all the time, but a carefully built portfolio centred around high-quality investments can help you offset miscalculations or ‘negative news flow’.
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