Brexit and the importance of investment diversification
An email that I received this week emphasises the importance of diversification in an investment portfolio. By diversification I mean ‘not putting all your eggs in one basket’ so that in troubled times, such as the circumstances we have seen since the Brexit vote, if one asset type plunges in value the others might be doing a bit better.
The reader was actually writing in response to investment articles that I wrote before joining Moneywise but the lessons that he describes are universally relevant and worth sharing. Here's what he said:
“About 6 years ago I took your advice and consolidated all my numerous pensions in a self-invested personal pension (Sipp). As you said this gave economies of scale and flexibility.
“As you suggested I then invested using tracker funds and exchange traded funds (ETFs) to give global diversification.
“At the current time the impact from Brexit on my Sipp has been limited and fairly stress free.
“It’s early days yet so I am not complacent but your advice has been very helpful.”
When you’re putting together the building blocks of an investment portfolio, alongside cash, the ultimate among safe haven assets, think about holding UK and overseas shares, plus bonds and commercial property. Some investors like to hold a bit of gold too.
The aftermath of Brexit has shown how these assets performed differently: UK shares plunged and then resurged, gold has performed well, while government bond prices rose to highs. However, commercial property funds have suffered from a ‘rush for the door ’ by some investors who fear London property prices could fall due to a drop in overseas demand.
Investors who, like this reader, have made sure that their portfolios are well diversified will be best placed to weather any more storms ahead, whether from Brexit or the forthcoming US presidential election.