There is always a temptation to fiddle around with a portfolio\u2019s structure to try to position it ready for potential short-term global events, such as Brexit. Investors would do well to remind themselves that the core tenets of good investing hold true through all market conditions.\u00a0 It is also worth remembering that the efficacy of a portfolio\u2019s strategy should be judged not on the post-event outcome, but in terms of the quality, validity and prudence of its construction discipline in the face of future market uncertainty.\u00a0 Portfolios are well-structured around inalienable investment truths, particularly the value of deep diversification.<\/p>\n
\n\u2018<\/span>One cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e. if history played out in a different way).\u2019\u00a0<\/span><\/span><\/p>\n
Nassim Nicholas Taleb – Fooled by Randomness<\/em><\/span><\/span><\/p>\n<\/blockquote>\n
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Irrespective of what might happen in the future \u2013 including any of the potential permutations of Brexit \u2013 as investors we can rely on a number of truths;<\/p>\n
\n
- Markets work pretty well and are hard to beat, so capturing the market return on offer using lower-cost, well-structured products makes good sense.<\/li>\n
- Spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy.<\/li>\n
- Balancing out the risks of equities by owning high quality bonds provides a good insurance policy<\/li>\n
- Being patient (living through the short-term dips) and being disciplined (maintaining your philosophy and strategy over time) are fundamental to achieving the returns you need to fulfil your financial goals.<\/li>\n<\/ol>\n
<\/p>\n
At this point \u2013 given the short-term uncertainty, and possible anxiety, over Brexit \u2013 let\u2019s focus in on diversification.<\/strong><\/span><\/p>\n
There are many ways in which an investor can be diversified, from individual securities to sectors, countries, investment styles and assets classes.\u00a0 Owning a portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK.\u00a0 In the UK a few names dominate; \u00a0the top 10 stocks represent more than 35% of the total UK market and the largest – HSBC – weighs in at 5.3% of the whole UK market.<\/p>\n
Companies;<\/strong><\/span>\u00a0A market-capitalisation weight to stocks across all developed and emerging markets shows a very different, well-diversified picture.\u00a0 The largest listed company in the world is Microsoft at 2.2% of the market.\u00a0It is worth noting that Microsoft\u2019s market capitalisation is over US$1 trillion, compared to HSBC\u2019s US$150 billion. \u00a0In a global market capitalisation weighted portfolio, HSBC\u2019s weighting is greatly reduced to under 0.5%.\u00a0 Astute investors\u2019 portfolios hold material allocations to non-UK equities and the majority of companies that this represents.<\/p>\n
Sectors;\u00a0<\/strong><\/span>Sector diversification also makes good sense.\u00a0 Owning a material allocation to global stocks ensure that sector exposures are diversified.\u00a0The UK has some large sector allocation differences compared to the world as a whole; in particular it has no major technology companies like Microsoft, Amazon and Google, despite technology stocks representing around 15% of global equity markets.\u00a0 UK exposure to technology stocks is less than 3%. The UK is also extremely overweight to the energy and basic material sectors.<\/p>\n
Portfolios are well-positioned to weather Brexit uncertainty<\/span><\/h4>\n
Brexit and the political chaos that we see before us, combined with the polarisation of politics between quasi-Marxist policies on the left and populist rhetoric on the right is unsettling for all.\u00a0 We are where we are, unfortunately, whatever one\u2019s Brexit views or political persuasion.\u00a0Yet there are commonalities in all client portfolios such as broad diversification, excellently managed, lower cost products and high quality bonds, that we can all rely on to see us through this mess.\u00a0 If it ain\u2019t broke, don\u2019t fix it.<\/span><\/strong>\u00a0 Portfolios are as well positioned as they can be for whatever lies ahead.\u00a0 Please try not to worry too much about your portfolio.\u00a0It is in good shape.<\/p>\n
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Risk warnings:\u00a0<\/strong><\/span>This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.\u00a0Past performance is not indicative of future results and no representation is made that the stated results will be replicated.<\/p>\n","protected":false},"excerpt":{"rendered":"
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