Don't let politics lure you off your long-term path
04 April 2017 | Markets and Economy
Commentary by Alexis Gray, Vanguard economist.
Brexit. Trump. More elections in Europe. What should you do with your investments when political risk is rising? I'm being asked this a lot at the moment.
If you want to react to these events, there are two things you need to get right. You need to predict the result of the election, or whatever the event may be, and also correctly anticipate the market's reaction to it. This is about timing the markets – a rare skill among even the most experienced investors.
Look at Brexit. If you expected the referendum to go as it did, did you also expect the market to sell off? You would have been right. But only for a couple of trading days, when the FTSE 100 dropped more than 5%. It then bounced back to finish the month well in positive territory. If you expected Donald Trump to become president of the United States, did you position your portfolio for a sell-off or a rally? Did you sell US equities and buy Europe? Or buy US at the expense of emerging markets?
Few of us, if anyone, can foresee the best- and worst-performing regions ahead of time. The chart below ranks equity market performance for six regions (UK, Japan, etc.) for the period 2012–2016. It also includes a well-diversified portfolio – global equities, shown in the pale blue band.
Note that the global portfolio's performance ranking remains steady for this entire period, while the other regions move up and down in fairly dramatic fashion. Indeed, if we extend the data range to 15 years, the global portfolio's position never moves at all. In other words, broad global diversification precludes the need to select the best regions and avoid the worst, or rotate regional allocations depending on the politics of the day.
So that's the long answer. The short answer is stick to your long-term strategic asset allocation and have a well-diversified portfolio.
Source: Datastream, Vanguard. Total returns in GBP. Asset classes represented by the following indices: World – MSCI All Country World index; US – MSCI USA index; UK – MSCI UK index; Europe ex UK – MSCI Europe ex UK; Asia Pac ex Japan – MSCI Pacific ex Japan index; Japan – MSCI Japan index; EM – MSCI EM index. Past performance is not a reliable indicator of future results.
Past performance is not a reliable indicator of future results.
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