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Four tips for investors from Brexit

16 October 2019

3 minute read

The countdown is on to October 31 when the UK is expected to leave the European Union. Here, we consider the impact of events so far and lessons for investors.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • How the UK stock market has performed since the vote for Brexit.
  • How to ride out ongoing uncertainty.
  • Why a fall in sterling is not always bad for investors.

Few could have predicted following the EU referendum result in 2016 how long it would take the UK to leave the EU.

Despite much political wrangling, Brexit negotiations have so far failed to trigger a significant stock market crash. In fact, many UK stocks have continued to make gains, albeit with some bumps in the road.

Here, we consider some of the potential lessons for investors from the Brexit process, and how they can use these going forwards, amid ongoing economic and political uncertainty.

Bear in mind that investments may fall as well as rise, and there is the risk that you could get back less than you invest, no matter what your investment approach.

Tip 1: Focus on the long term

The FTSE 100 index of Britain’s biggest companies has certainly been rattled at times, with market prices swinging on several twists and turns during the Brexit process. Yet, in general, the UK stock market has remained resilient, despite an uncertain outlook.1

Brexit will continue to test investors’ nerves and could make it tempting to sell out of the market.2 However, ditching investments during turbulent times may only serve to crystallise any losses, and means investors could miss out on any potential recovery in the market.

Focusing on the long-term and the reasons you invested in the first place is one way to prevent knee-jerk reactions when markets are choppy. Of course, there are no guarantees that you’ll be rewarded for sitting tight, so you must be prepared to accept the fact you could still lose money in the end.

Tip 2: Many factors impact performance

With Brexit dominating headlines over recent years, investors may be forgiven for believing that this is the primary factor that is currently dictating stock market performance. Yet there are many factors that could affect returns. For example, the continuing trade dispute between the US and China has caused some anxiety for investors.3

The reaction of the stock market often comes down to whether any particular news improves or dents investor confidence; a shock news story such as a bank run, for example, that no-one saw coming is perhaps more likely to have a dramatic impact.

Tip 3: A sterling slump isn’t necessarily bad for investors

Sterling has been on a roller-coaster ride since the Brexit vote, swinging in value depending on the mood of markets over the prospect of an exit deal between the UK and EU. Yet, a weaker pound doesn’t have to be bad for the UK stock market.

Many of the UK’s large, multinational companies listed on the FTSE 100make a large chunk of their money overseas. A weaker exchange rate is of benefit to these companies, and their investors, boosting their profits when they are moved back into sterling.

Conversely, a strengthening pound may result in profits made overseas by UK companies are reduced when shifted into sterling.

Tip 4: The benefits of diversification

The UK economy plays a small role in global investing. If investors take a broad and diversified approach by investing in different geographical areas, the highs and lows of Brexit should hopefully have limited impact. After all, companies solely focused on the UK ideally only make up a proportion of a diversified mix of investments.

Taking a global approach means investing in a wide range of stocks and other assets (e.g. developed government bonds, high yield credit, emerging market bonds) across world markets, as part of a diversified basket of investments. This could also potentially help to minimise the impact of stock market shocks on home soil on your nerves, and your returns. While one region may suffer a fall, gains elsewhere may offset these losses.

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