The Brexit effect on the markets may surprise you
It’s three years since Britain voted to leave the EU. And what’s happened since for investors highlights that you need to be careful about who you listen to, and what you take away from them.
People like to give predictions about the future, but none of us know what will actually happen. That includes politicians, think tanks, bankers and economists.
After the referendum result, a lot of people predicted that the stock market and the property market would crash. And when those people are on TV and in the national press, they have strong credibility. They seem trustworthy.
But a lot of predictions are built on opinions. And that means they’re not always right.
The performance of the markets since the vote
The chart above starts from the day of the referendum, 23 June 2016. The five lines represent:
- A: An investment portfolio with 100% stock market exposure
- B: The MSCI Capital Index, which measures combined global stock market performance
- C: A typical portfolio, with 60% invested in the stock market and 40% in low-risk bonds
- D: The FTSE 100, an index of the UK’s largest 100 companies
- E: The Halifax Property index, measuring average national house prices
The chart shows that:
- The FTSE 100 has gone up in value over 32% since the referendum
- The super-aggressive 100% stock market portfolio has risen over 48%
- The world index tracker is up over 40%
- The property market index is up more than 11%
Those figures are probably quite startling for anyone who hasn’t been tracking the markets closely over the last three years, compared to the media reports we’ve been seeing and reading.
But good news doesn’t sell.
What can we take from this data?
I’m certainly not saying it’s all been good news on the market, as you can see from the volatility of the aggressive portfolio: in Q1 of 2018, the fund fell 10% after rising consistently before that.
And it’s during those downturns that psychologically, we want reassurances. If the most prominent reference you have is the news, and if you’re using the news to educate you, you’re going to invest according to the headlines.
Instead, you must go back to your investment strategy and philosophy, make an agreement with yourself: ‘I’m going to invest in these funds, for this period of time, with this much money. And when something catastrophic happens – when, not if, because the markets will pull back at some point – I’m going to sit tight.’
You set the date until which you will follow that strategy, which typically is around seven years before retirement or before you’re going to need the money, and you hold tight. You don’t need to fret about the headlines and the markets every day, just check in every so often – annually is usually enough.
Following a strategy that matches your goals, your risk tolerance and your risk capacity is how you should invest. It’s what differentiates a true investor from a speculator or gambler.
Follow the evidence
When investing, use an evidence-based strategy – you shouldn’t base your decisions on marketing any more than you should on the news. Neil Woodford’s fund is a good recent example, which was widely promoted as a ‘Best Buy fund’ by some advisors. That kind of terminology makes me cringe.
An investment or fund is NOT a product to be sold like bananas or shoes. It’s not about getting rich quick.
It’s about setting a strategy which is right for YOU, and following it.
You’ve got to cut through the noise and start with Step 1 of The Money Plan: what’s your outcome? What do you want to achieve?
After that, what does the evidence tell us? The academic research that’s been done is clear: buy the index, diversify as much as you can, invest in markets all across the world, and don’t try and think you can predict the market and what’s going to jump up next.
And once you buy, hold for as long as you can. Warren Buffet said the best period of time to hold your investment is forever! As someone who made his billions through investing, not through selling funds, I’ll take his opinion over those promoting their Best Buys.