Investment strategies to help cope with a summer of uncertainty
This summer presents a number of geo-political concerns for investors – the biggest of which is the run up to and the aftermath of the EU Referendum vote.
With a month to go until the vote and with results looking increasingly uncertain, Tom Stevenson, investment director for Personal Investing at Fidelity International looks at what investors can do to prepare themselves for a potential summer of volatility.
Tom Stevenson said: “The EU referendum has created an unprecedented level of uncertainty for many investors. Nobody is sure what either outcome – particularly a ‘leave’ vote – would actually mean for individual stocks or sectors. Leave and the markets could slump, stay in and we could see a relief rally and in the lead up, UK equity valuations have started to fall. All in all, the next month is shaping up to be a jittery time for investors in the UK. So what can be done to navigate the choppy waters ahead?
“A well-diversified, balanced portfolio and a focus on long-term goals rather than short term headlines looks sensible.”
In an unsettled environment, investors should try to remain calm and look to maintain core investment principles:
Don’t panic and stay invested
“While the EU referendum is clearly unsettling investors, it is essential to hold your nerve if markets get choppy.
“Wholesale moves in and out of the market are rarely a good idea. First, because the trading costs involved are too high to make such a radical move sensible. Over-trading always eats into investment returns and is best avoided. Second, because markets are great discounters of news. Investors have been factoring in the possibility of an EU exit for some months now so there is a real possibility that a vote to stay in would result in a big rally in markets. Being out of the market this summer looks riskier than ever.
“It is also worth remembering that staying fully invested through market cycles makes sense because missing even a handful of the best days in the market can seriously compromise your long-term returns. The best days in the market invariably follow close behind the worst ones – time in the market matters more than timing the market.”
Diversify your holdings
“An investor located in the UK does not need to restrict their investments to the UK – even a large slice of Britain’s blue chip index, the FTSE 100, is made up of international companies, giving investors global exposure.
“Clearly the EU vote will have a significance beyond these shores but its major impact is like to be on the UK economy. As such there has never been a better time to ensure that your portfolio is well-diversified geographically. Diversification of asset classes also looks sensible in the next few months and is often the best defence when faced with an environment which is likely to tense with market and political uncertainty.
Drip feed your investments.
“Drip feeding your money into the markets rather than making a lump sum investment can be a sensible way to approach investing. This is especially true during bouts of uncertainty.
“By regularly investing throughout the year, you’ll benefit from a process called pound-cost averaging. This means you end up buying more units when prices are low and less when they are high. In addition, the more short-term volatility there happens to be, the greater the effect is.”
Go active
“During periods of uncertainty, the flexibility of active investing can be hugely beneficial compared to the rigid allocations of passive strategies.
“Active stock pickers have the ability to sort the wheat from the chaff, ensuring that not only the best quality investments make it into the fund but equally, avoiding any companies that are vulnerable in an unsettled market environment.”
Focus on wealth preservation if capital loss is a concern
“One way to mitigate volatility in markets is to invest in a balanced fund. These funds attempt to smooth returns by combining a range of defensive and growth-focused assets. One example is the Fidelity Multi Asset Balanced Income Fund, which might suit relatively cautious investors looking for income during market instability. The fund holds an equal balance of lower-risk bonds and some higher-risk assets like global equities for greater growth potential.
“However, in more uncertain times, wealth preservation might be your ultimately goal. If this is the case, you may want to consider funds such as the RIT Capital Partners investment trust, which aims to generate long-term capital growth while preserving its shareholders’ capital.”