AS some major milestones are passed in the Brexit process, there is still plenty of uncertainty about the future, and therefore much for investors to consider.
We therefore propose to take a step back from the melee and identify some hopefully useful points to keep in mind as we try and invest through all this.
1. Whatever the outcome, the world will keep turning
While we can’t say with any great certainty what will happen to the UK economy in the next 12 months, we can more easily say that the rest of the world won’t lose much sleep over it. The UK accounts for around 4 per cent of the world’s GDP, whilst continental Europe, for example, accounts for 20 per cent. But it continues to be the US economy, with its all-important and currently well-capitalised consumer, that sets the drumbeat for the world and its capital markets. We can happily continue to point out that the health of the US economy looks good, the next recession not yet visible on the horizon. This remains where our analytical energies are best focused, rather than the sound and fury of the seemingly never-ending Brexit saga.
2. Long term investing has little to do with politics or recessions
It is worth remembering why we invest in the first place: to harvest the financial fruit of humankind’s continuing restlessness and ingenuity. Happily, the world’s capital markets provide us access to this yield, chiefly through corporate profits. The grander forces motivating a belief in a profitable future have little to do with Brexit, the incumbent US President, or indeed the next recession.
An investment now derives from a conviction that humankind will continue to invent new stuff and get better at using it, alongside an assessment that today’s price for a ticket on the ride is not extortionate. We are happy to continue answering yes to both of these questions. Some years will be good; some, like 2017, fantastic. Some years will be bad; some, like 2008, terrible. However, providing one shows up in sensibly diversified fashion and stays the course, the average of these years will compound over time to deliver something that should comfortably beat the returns available from cash.
3. Retreating to cash ahead of predicted volatility is a potentially hazardous strategy
Many will rightly point out that that the current impasse in which the UK finds itself was entirely predictable. Surely the sensible thing, as with all forecast storms, would have been to seek shelter? Though entirely logical, this is unfortunately a difficult investment strategy to profitably execute.
This is partly because it is often at the seemingly darkest times that the brightest futures lie ahead. As they say, one should be “greedy when others are fearful”; many of the market’s worst days are clustered just before its best.
Secondly, though we are always trying to avoid difficult environments where possible, the challenge is that market prices already represent the collective hopes, fears and expectations of the world’s investors. The more obvious the storm, the more likely that it has already been factored into prices.
Finally, the potential benefit from successfully timing the market is usually negligible compared to the cost of failure, unless we have absolutely perfect foresight. Given this asymmetry, both in payoff and in likelihood, it is far safer to simply stay the course, remind ourselves of the bigger picture, and resist the urge to take potentially harmful evasive action.
:: Claire McCombe is a private banker with Barclays Wealth & Investments NI
