Post Brexit Investment Lessons

Many people woke up on the Friday morning of 24th June facing the apocalyptic scenario of the pound falling like a stone and the UK stock market poised to open over 8% down at below 5,800 following the surprise decision to leave the EU. The media did its best to turn a price correction into a full blown financial market catastrophe. It did not occur to financial commentators that for foreign investors the UK stock market was much better value than it was the day before. Indeed for a dollar based investor the FTSE 100 index opened over 15% cheaper compared to Thursday’s close. Nor did it occur to the media that the majority of earnings of FTSE 100 companies are not in sterling. So a sharp fall in the pound would boost earnings reported in sterling massively. Instead the “talking heads” on your TV screen were telling you to put on your tin hat.

Lesson 1: Ignore the Media

So the first lesson for investors is to ignore the hype of the financial media. Investors who are prone to panic and liquidate their holdings on the back of financial media hysteria have a very poor investment track record. Those investors who sell as the market is falling amid a media frenzy do not have the mental strength to re-enter the market any time soon.

Lesson 2: Try to Stay in the Market

Typically the best one day moves in an equity market often immediately follow the bad days. Numbers crunches by Fidelity show that if an investor in the FTSE 100 missed just the best 10 days in the 30 years to mid-January 2016, the return would be 49% lower.

Lesson 3: Diversify

The above example shows the benefits of staying in the market even when the media seem to be losing their heads. However this is easier said than done. An investor solely exposed in the UK stock market would, on that Friday morning, have faced the extremely worrying prospect of an 8% erosion of his or her wealth. At Conçerva we try to avoid this happening by recommending investing in multi asset portfolios comprising low correlated assets like overseas equities, sovereign bonds, etc. Diversified multi asset funds are much less likely to deliver such an early morning shock.

Indeed the FTSE 100 index ended the 24th June session 200 points down or 3% lower. Conversely, a cautious multi asset portfolio, with a 40% equity exposure, ended the same day up 1.5%. The lesson here is that if you diversify you are less likely to be driven to make the wrong investment decision and more likely to stay in the market.