Navigating Brexit
Brexit. The word that divides a nation. And by equal measure, also confuses it. Customs unions, single markets, free-trade areas, divorce bills, hard Brexit, soft Brexit, medium-rare Brexit… how should investors react to momentous political events?
As a member of Vanguard's European economics team, I have the pleasure of following every twist and turn of this saga, yet even I struggle at times to get to grips with all of its nuances and details. Will Prime Minister Theresa May create an alternative solution to solve the Brexit impasse? What is Jeremy Corbyn's position on Brexit, and will it change if he gets into power? And what about the practicalities – citizens' rights, aviation, customs borders, etc – if the U.K. does crash out in March 2019?
Counterintuitive
To be honest, I and many others can take a stab at providing answers to these and other questions, but the truth is we just don't know how it will pan out. When even pundits and experts disagree over critical policy details, it would seem that much of the relevant legislation and documentation covering Brexit is open to interpretation. Even then, politicians know that ultimately politics is all about compromise.
The experiences of both the referendum on Brexit and the U.S. presidential election in 2016 are clear reminders that even if you are able to predict political events, the market reaction can sometimes be counterintuitive. Against conventional wisdom, both economic growth and the stock market in the UK recovered strongly after the Brexit vote. The same happened in the U.S. when Donald Trump was elected to the White House. And after sterling's ejection from the European Exchange Rate Mechanism in 1992, the U.K. economy confounded the pessimism of politicians and pundits by embarking on a strong and sustained recovery.
Tried and tested
Ultimately, the final Brexit outcome and the reaction of financial markets will be out of our control. In attempting to navigate through such a challenging investment environment, it would be more worthwhile to focus on what we can control instead.
The tried and tested keys to help deliver strong long-term results for investment portfolios have proved to be global diversification, investing at low cost and being disciplined in implementing your long-term strategy:
Global diversification can reduce volatility. Being invested across different global markets can provide protection from domestic economic shocks.
Stick to your long-term investment strategy. In times of uncertainty, it is important to be patient and to stick to your long-term investment strategy. Geopolitical events are difficult to anticipate and timing the market is hard. Time in the market is much better for your portfolio than market timing.
Costs matter more than ever. When the markets are weak and investment returns are low, fees account for a larger share of those returns. Minimizing costs can contribute to stronger investment performance over the long term.
Discipline is what it takes to block out the noise, commitment is what it takes to walk the path to financial success and patience is what it takes to reach the goal.