The last week post BREXIT has illustrated several key investment truths:
- The performance of individual shares and sectors can diverge significantly from overall market returns
- There are huge benefits to having a diversified portfolio of global assets
As the events on Friday unfolded certain stocks were punished – Barclays and Lloyds both down over 20% but others like Randgold were up 20%. The reality being that if we held money in specific UK companies we would have suffered losses, and although some have now recovered over the last five days’ others haven’t (Banks, Insurers etc).
Many countries, sectors and assets classes
As an example the Balanced Portfolio holds 15% in UK Funds, and although there is exposure via investment trusts this is offset by a diversified spread of investments across countries, sectors and asset classes.
January 2016 posted negative figures; up to the 30th June this year there have been incremental positive increases in the portfolio month on month, meaning we have delivered positive returns in a period of epic volatility (yes, that includes June!). The chart below shows the performance of the portfolio from 1- 30 June vs the FTSE All Share:
The diversity of the portfolios allowed investors a level of protection from the majority of falls, and volatility, whilst capturing some of the bounce in the last couple of days. This was achieved because around 40% of funds invest in overseas companies (US, Europe etc) and as Sterling has weakened this has acted as a hedge against falls in these markets.
We are continuing to monitor this carefully and more details will be included in the quarterly update.
What to do now
The worst thing to do in a financial crisis or recession is pull all your money out. If you do sell, you could be selling at the lowest point and lose any gains (or lock in losses) you may have made.
It is worth reflecting on this from Schroders:
“We looked at the FTSE All-Share, the broadest measure of the UK stock market, over a decent timeframe – the past 25 years. We then filtered the data to show the 20 greatest one-day falls and looked at what happened over the days and years that followed. On the worst day, during the depths of the global financial crisis on 10 October 2008, investors lost 8.3%.
However, one year later, the index had surged and returned 26%, including income paid through dividends, to investors. The returns continued: after three years the total return was 41% and after five years it was 87%.
The figures apply to those holding investments before the market fell. Those who bought at the low points on those days would have seen even greater returns.
Most of the worst days, were during the severe market turbulence of 2008. Look back to 11 September 2001, the day of the terrorist attacks on the US, and the fall was 5.2%, the eighth worst in the last quarter century. The market struggled in the years after that as the technology bubble continued to deflate, but after five years, it was 44% higher.
The most notable five-year gain following one of the top 20 worst days was 126% after a 5% fall on 28 February 2009, another episode in the financial crisis and shortly before the UK bank rate was cut to 0.5% and the Bank of England’s programme of quantitative easing was announced.
It’s worth noting the wild volatility that often follows a big one-day stock market fall. For example, in the 10 days after 27 September 2008, the sixth worst day, the FTSE All-Share lost 22%. Yet still, the total return was 61% after five years.”
It is uncomfortable at the moment, and there will be more volatility however we believe the diverse nature of the portfolios provides an element of protection. It is tempting to sell but this may mean selling at the worst time and the only “safe” option is cash, but with the chance that interest rates may move to zero and inflation on the rise this may not be the place to be! Obviously if you have cash, some may argue that now is the time to invest.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.