After the uncertainty caused by the referendum result, our clients are delighted (and in most cases, surprised) with the performance of their investments because the equity element of their portfolios has increased markedly. However, the bond element has performed poorly and with the Bank of England base rate at 0.25%, bond returns are likely to be low for some time.
One client understandably asked the question “why not move everything away from bonds to equities as they have done so well?”
I explained that investment is a strategy for the longer term and the bond element is there to provide stability and reduce volatility. Indeed, all the component parts of our portfolios are there to increase diversification and thus reduce the inherent risk. The investment strategy that we have been using has been shown to work for decades and we do not expect to change it because of short term circumstances. Moving everything into one asset class just because it happens to be doing well is definitely a fool’s game – trying to time the markets never works consistently for anyone.
The recent good performance is due to us designing a highly diversified global portfolio where international companies see the uncertainty in the UK economy created by the Brexit vote, as an opportunity to make money out of the UK. A significant reason for the rise in the FTSE 100 is because the top 100 companies listed on the UK stock market are global in nature and the dramatic fall in the pound has given them the opportunity to buy cheaply. (Apparently the pound has beaten the Argentine peso to become the worst performing currency in 2016 after it plunged to a 31-year low in the aftermath of the decision to leave the EU.)
The summer recess has rendered the politicians quiet for the last few weeks, but soon things will start to heat up again and more uncertainty may follow. Our clients can relax and know that their investment portfolios are designed to take account of all eventualities, so whatever the Daily Mail or the News at 10 says about the FTSE, the pound, or the economy, here at Magenta, we have our collective finger on the pulse and clients need have no concerns.
Author, Julie Lord, CEO