Political uncertainty seems to be the new norm. It is still not possible to predict exactly when and how Brexit will be delivered, and Parliament rises for Summer Recess with the UK Government still facing a range of challenges on this and other matters.
Investors may be anxious about the impact events could have on their portfolio. As it is impossible to say with any certainty which way any currency or stock market index will move next, it is, perhaps increasingly, important that investors adopt a long-term investment approach and ensure their portfolios are prepared for any potential volatility. This applies not just to UK-based investments but to all investments.
Why diversification matters
Ensuring your portfolio is properly diversified by investing in a combination of shares, bonds, property, commodities and cash can help reduce overall risk and volatility caused by political uncertainty.
As your money is invested across several different asset classes, if one of these fares particularly badly, the overall impact on your returns will be lower than if you’d invested in this asset class alone. Of course, the opposite effect also applies – if one asset class performs well, the favourable impact on your returns will be lower.
You may also want to consider holding funds invested in different geographical areas, to further spread risk and protect you from stock market falls. Bear in mind however, that this exposes you to foreign currency risk. This means that when sterling is weak, your pounds will buy you fewer foreign currency denominated investments. However, if you already have overseas investments, lower exchange rates can work to your benefit, as this will boost their value to you.
Bear in mind of course, that volatile share prices could offset any gain or loss from currency movements.
Avoid panic decisions
When the stock market rollercoaster ride can seem hard to stomach, remember that often the worst thing you can do is to panic and sell out of your investments. By doing this you’ll crystallise your losses, whereas if you’re able to sit tight during the bad times, you may, in time, be able to benefit from any recovery.
Dipping in and out of the market and trying to pick the best times to invest is an extremely risky strategy, as no-one knows for certain which way markets are likely to move next.
Instead, investing regularly can help smooth out volatility, as your contributions will buy more shares when prices are low and less when they’re expensive. Over the long run this should help ensure you benefit from both market ups and downs. Remember, however, that regular investing won’t always work in your favour and you could lose out if each time you invest the market is up and then falls.
Find out more about the benefits of making regular investments
As always, make sure you have as much information as possible before you make any decisions about your money. No matter how you try to protect yourself from uncertainty or otherwise, values can still fall and you might get back less than you invest.