So far, I have managed to stay completely silent on the topic of Brexit, at least on this blog. However, I have been asked many times if I have a secret investment plan for surviving and even thriving in the event that the UK voted to leave the EU.
Since we now have just such a vote, I thought it would be remiss of me not to say a few words, although I will be sticking purely to my secret investment plan and not wandering into the murky world of politics.
I'll work through each of the major points in turn and then reveal my secret plan:
Point 1: A vote to leave the EU means more uncertainty
I think it would be difficult to argue against this point, in the short-to-medium term at least.
Although the long-term uncertainty around both the Remain and Leave outcomes is probably about the same, i.e. nobody has the faintest idea how the world will look 10, 20 or 30 years from now, I think we can safely say that over the next few years, the future of the UK economy just got a whole lot more uncertain.
Point 2: The future was, is, and always will be, uncertain
The fact that the future is uncertain, Brexit or not, should not exactly come as a big surprise to most investors. Investing is after all the art of trying to take on a degree of uncertainty in a profitable manner.
There are several key uncertainties which are always true and which investors should never forget:
- The future of any single company is highly uncertain
- The future of any single industry is highly uncertain
- The future of any single country is highly uncertain
- The future of the stock market is highly uncertain
The vote to leave the EU has made people much more aware of that third uncertainty than usual, but the point is that these risks and uncertainties are always there, whether we are aware of them or not.
In my opinion, Brexit is just another risk in the unending sequence of risks, which investors have to face up to. As such, I don't think it's sensible for investors to have any special plans for Brexit, or any other specific event.
Instead, I think they should follow a simple plan which is designed to keep risks and uncertainties to acceptable levels at all times, regardless of what events may or may not occur in the future.
Point 3: Diversification is by far the best defence against uncertainty
From an investment point of view, my preferred method for dealing with these uncertainties is to stay widely diversified across each dimension:
- Avoid being over-exposed to any one company
- Avoid being over-exposed to any one industry
- Avoid being over-exposed to any one country
- Avoid being over-exposed to the stock market
Since the underlying risks are always and forever present, I think each of these risk avoidance strategies should be used at all times and in a consistent manner, regardless of whether the market or the economy is up or down, volatile or calm.
My secret Brexit investment plan: Keep calm and carry on
By now, it should be fairly clear that there is no secret Brexit investment plan.
Like most investors, I am not as clever as George Soros and I have no ability to stay "ahead" of the market by shorting the pound or the FTSE 100, or moving into this, that or the other sector which may or may not suffer/surge in the post-Brexit boom/bust.
Instead, I use a simple diversification policy, which I will not be changing one jot because of the UK's decision to exit the EU.
That simple diversification policy follows on from the four key uncertainties mentioned above and is designed (along with a collection of other rules) to produce a portfolio, which generates higher returns than the FTSE All-Share whilst also being less risky:
- Don't have more than 6% of the portfolio invested in any one company (which means holding 30 companies most of the time).
- Don't have more than 10% of the portfolio invested in any one industry or sector (i.e. three out of those 30 holdings).
- Don't have more than half of the portfolio's aggregate revenues (or profits) coming from the UK.
- Stay 100% invested in equities at all times (rather than trying to "time the market" by moving into cash in a bear market or using leveraged equity products in a bull market).
If you choose to avoid being over-exposed to companies, industries, countries and equities, then you may choose to use slightly different rules to those listed above.
- If you are more of a risk seeker, then you might choose to hold 20 companies instead of 30, with a maximum of 10% per company instead of 6%.
- If you are more risk averse, you might choose to have, say, no more than 50% in equities, with the rest in cash or other fixed investments.
However, the basic idea of always being widely diversified across multiple dimensions of risk is still a very good one, especially for stock pickers.
At the very least it is, for most investors, a far more sensible way to cope with the uncertainties of Brexit than any quick-footed attempt to either avoid losses or make a quick profit.