[Trigger warning: Off the cuff Brexit thoughts ahead. Reading is optional! My blog, my thoughts, and I’ve started so I’ll finish. Just click away and you needn’t be troubled by it! Nor will you feel forced to be rude about me in the comments.]
A few days after the Referendum in 2016, I wrote a short satire chronicling the happy state of Barry Blimp, a middle England Leave supporter:
And Brexit is going so well! Better than even Barry might have expected.
True, the markets initially dipped 2-3% percent when the result was announced, as lily-livered Remainers sold their holdings and made enquiries about moving to Australia.
But equities soon bounced back as brave Brits like Barry stepped in to staunch the bleeding.
Article 50 was triggered immediately, and the terrified Europeans quickly caved in to all the bold Brexiteers’ demands.
Now international capital is flocking to the UK, as it sees how the nation has freed itself from the yoke of EU membership that had held it down and kept it only the fifth largest economy in the world.
At this rate we’ll be challenging China for the number two spot by Christmas!
Two and a half years on, and as fantasy has given way to fact an apology is required.
I apologize to anyone named Barry.
Back in the (sur)real world, Brexiteer MPs – including two former Brexit secretaries – are looking to thwart Theresa May’s best attempt at solving British politics’ version of Gödel’s incompleteness theorem.
They aim to derail May’s deal by employing the same meaningful Parliamentary vote won by those they once branded “The Enemies of the People”.
Just another day in Brexiteer-land.
After that Referendum
As predicted, Brexit has been an all-consuming waste of time for nearly three years1.
And it’s done this blog no more favours than the country.
I lost many readers in the Referendum’s divisive aftermath. I became less enthusiastic about writing here, too.
At least Remainers and Leavers are now united in agreeing Brexit has been a shambles.
My more constructive critics suggested I focus on the investing implications.
I see their point, but the perverse contradictions of Brexit makes this easier said than done.
Macro-economic forecasting is always fiendishly hard, and with Brexit the range of outcomes is very wide and the appropriate actions you might take at odds with each other. Assigning probabilities to the various exit scenarios feels like betting on raindrops sliding down a window pane.
The only certain advice is to be diversified. But that is always the best advice.
Even leaving aside the fickle markets, let’s consider the British economy.
The story so far
Everything that has happened so far is before any Brexit, remember. Today we still enjoy exactly the trading arrangements as we did before the Referendum.
Still, I thought uncertainty alone could take us into recession after the Referendum. I wrote a post saying so, and suggested ways to think more defensively.
But as things turned out, there was no recession. Some criticism from Leavers on those warnings is understandable.
So why did the economy keep growing, against expectations?
Perhaps I and others were wrong to be so gloomy, but there were other factors – the unexpected delay in triggering Article 50, the interest rate cut (opposed by many Brexiteers), and most of all a sudden recovery in the Eurozone, ironically enough. It’s hard to have a recession when your largest trading partner is expanding, retooling, and restocking, even as interest rates are being cut towards zero.
The weak pound probably hasn’t hurt either, although it’s squeezed importers – not least struggling retailers and restaurants.
Also, while we didn’t go into recession, we did go slump from being the fastest-grower among the leading G7 economies to the slowest:
Source: Full Fact
If you’re a hardcore Brexiteer who wants maximum sovereignty then this economic hit – and even the chaos of a No Deal exit – may well be worth it.
I can respect that point of view, though I think maximum technical sovereignty is a hollow victory in our incredibly integrated world (we’re already seeing that in the compromises May struck with Brussels).2
But for the rest of us, it’s a bit sickening to imagine where we might be now had Remain won.
With Europe recovering and the rest of the global economy motoring, we’d likely have seen a mini-boom. Higher real wages, and politicians focused on all the important issues they’ve been forsaking for the phony Brexit war.
Maybe we’d even have made more headway with the public finances.
Pounding the point home
As for our personal finances, so far Brexit has appeared to be a boon for well-diversified British investors based in Britain.
This is due entirely to the sharp fall in the pound – something Brexiteer MPs reliably fail to mention when citing a rise in the FTSE 100 as proof the market is fine with Brexit.
As is now well understood, global equity trackers mostly hold overseas assets. Three-quarters of the revenues of the UK’s largest companies come from abroad, too.
So the sharp fall in the pound on worries about what Brexit means for Britain has actually boosted both the London market and many a diversified Monevator reader’s net worth.
Of course, that’s measuring your net worth in sterling terms, as most of us do.
On the global stage we’re poorer than before the Referendum, due to that plunge in the pound. This loss of purchasing power is showing up at the margins in higher import prices including food and fuel, and in Britain becoming a less lucrative market for EU workers.
You’ll also have felt it if you’ve holidayed abroad.
Investing in the face of Brexit
Having made it thus far intact through the Brexit saga, what should investors do now?
Well, in terms of your personal finances, I think a safety first review is in order. Even Brexiteers admit crashing out without a deal in March will be disruptive. At the other end of the spectrum the forecasts are dire.
Either way, given Hard Brexit has become a very possible – if still less likely – outcome, make sure you’re sandbagged against any potential storms.
I think my original post on actions to take ahead of a possible recession is worth reading.
What about investing specifically?
Passive investors
The good news for well-diversified passive investors is they needn’t do much, if anything.
Indeed the entire Brexit saga has been another notch on the bedpost for strategies like our own Slow & Steady passive portfolio.
One of many benefits to getting your equity exposure via a global tracker (or a basket of large geographic equivalents) is you diversify away country-specific risk. This inoculates you against the dreaded ‘Japan syndrome’ – the possibility that a particular country’s stock market goes down not for a brief bear market but for an investing lifetime.
True, with the bulk of its earnings generated overseas, the UK’s FTSE All-Share is less at risk of this than most indices. But it is still good practice for hands-off passive investors to follow the global money, as we’ve explained before, and it has served you well in the face of Brexit.
Most passive portfolios will also own a chunk of UK government bonds (gilts), which have held up well.
Of course gilts have not benefited from the weaker currency, but that’s fine. A good portfolio is about balance. Bonds are not really there for return, and you’ll be happy to have some exposure to the pound if Brexit is resolved amicably and sterling rallies.
Beyond those two lynchpin holdings come corporate bonds, commercial property, foreign bonds (typically hedged) and more exotic fair such as emerging market and small cap funds, gold and commodity ETFs, as well as factor funds.
These should all be relatively small allocations, and so in the short-term they shouldn’t be determining how your portfolio fluctuates as Brexit progresses. Their aim is rather to gain a small edge over the long-term.
Active investors
When I started this post I thought this would be the biggest section. Now I’ve got here though I find myself thinking there’s little to constructive say to my fellow naughty active investors.
I can only tell you what I’ve been doing.
Note: This post should be taken as a talking point, not as advice as to what you should do yourself. I am far less sure as to how things will unfold than I was even in the financial crisis! See below for more.
Firstly, I am shifting my portfolio allocations around a lot – daily – as things change. This has a big cost in terms of friction and hassle, but, well, that’s what I’ve signed up for. (See this for more. And again I don’t advise it!)
Right now I have the smallest allocation to UK -listed companies – my traditional stock picking ground – I’ve had in 15 years, though it’s still above benchmark weighting. I’ve been especially wary of most UK-focused firms.
Percentage-wise I’m the least exposed to equities I’ve ever been as an investor, although mostly for reasons other than Brexit.
I hold huge (for me) wodges of cash as well as a handpicked and changeable collection of bond ETFs. I’m 6% in gold ETFs (hedged and unhedged).
Diversify, diversify, diversify!
For two years now I’ve also invested with one eye on the exchange rate, which has been an extra headache.
Several times I’ve increased my UK focused holdings when the outlook has looked brighter.
The pound looks undervalued, and I fear a sudden reversal if Brexit pessimism proves unfounded.
But mostly the traffic of UK holdings from my portfolio has been outbound.
This snapshot of the biggest fallers from the FTSE 100 mid-afternoon yesterday gives a good idea why:
To make matters even more complicated, many UK-focused companies are probably falling due to the growing chance of an interventionist Jeremy Corbyn government.
In fact active investors trying to position their portfolios in light of the various Brexit outcomes have to think about at least five credible scenarios (my guesses on the likely impact in italics):
Hard Brexit – Clearly now possible given the universal dislike in Parliament of Theresa May’s deal and the time left before we’re meant to leave. Bad for UK-focused shares, unclear for gilts, very bad for the pound, good for overseas earners/holdings, could see interest rates may go higher or lower.
May’s Deal (previously Soft Brexit) – The deal on the table pleases nobody (leaving aside the fact that it’s not even really a deal, just a divorce settlement and an outline for how to proceed). In the short-term at least it’s a far worse arrangement than we have now in almost every respect. But MPs might end up voting it through anyway because it’s better than Hard Brexit. Okay for UK-focused shares, unclear for gilts, good for the pound, bad for overseas earners/holdings, interest rates probably go higher.
A New Amazing Deal With Unicorns – Perhaps the Government will somehow get more time to come up with something better. I don’t believe anything much better is possible, given the contradictions of Brexit and the EU’s position, but who knows. Great for UK-focused shares, unclear for gilts, good for the pound, bad for overseas earners/holdings, interest rates probably go higher.
Second Referendum / No Brexit – Does anyone believe Leave would win a Referendum if it was held tomorrow? Brexit was blatantly mis-sold, which you’d think would be enough to reverse Leave’s slender majority. I worry about the democratic impact of not Brexiting, given how it’s been spun up as The Will of the People, but that’s for another day. Still unlikely, anyway. Great for UK-focused shares, unclear for gilts, great for the pound, bad for overseas earners/holdings, interest rates probably go higher.
General Election – Possible now, and I think Jeremy Corbyn would have a fair chance of winning. It’s unclear what the Labour party’s approach to Brexit is. Yes I know what they say, but are, for instance, the fantastical ‘six tests’ really meaningful? Bad for UK-focused shares, bad for gilts, bad for the pound, good for overseas earners/holdings (short-term), interest rates may go higher or lower.
As you can see, describing Brexit possibilities as a binary outcome doesn’t really cover it.
Moreover as these possibilities come to seem more or less likely, their consequences are brought forward or discounted on a moment to moment basis.
Traders might thrive in such an environment (though I’ve seen little evidence of that) but it sure makes the fundamental company-level analysis I mostly employ extremely difficult.
Passive is a great alternative. If I could click my fingers and do it all again I think I’d put everything into a Vanguard LifeStrategy 60/40 fund the day before the Referendum and not look at my portfolio until this is over!
How are you invested?
Finally, remember our recent discussion of mental accounting in all this. In particular factor your home into your thinking about your exposure to recession and market risks, assuming you own it.
If you’re concerned that your global trackers mean you’ll be hit should the pound rise, your house may comprise a huge proportion of your wealth that effectively hedges against that possibility.
On the other hand if you’re a stock picker who has mainly been buying cheap UK-focused shares, the opposite could apply. Your house could fall 20% or more in some Hard Brexit scenarios. Why take the risk of all your shares going the same way?
How have you been investing through Brexit? I am sure – indeed I hope – we’ll hear passive investors say “drama, what drama?” That’s what this site exists for!
But I’d also be curious to hear how fellow travellers along the dark side of investing are approaching the conundrum.
Comments on this entry are closed.
It’s completely pointless to try to predict the impact of Brexit on stock markets. In any timescale more than a year or two it’s going to be almost completely irrelevant. More important are things like oil price, population growth, China’s strategy, but even they are not worth worrying about too much. Just keep investing with regular contributions to a globally diversified portfolio, and try to enjoy life as much as you can. Cheers!
Mostly, I’ve just kept on doing what I normally do with most of my money dripping into a LifeStrategy fund each month.
I’m about 20% cash now though, I’d sold off a lot of stocks that had done well over the last 6-9 months and been holding on to that to pick up some bargains if the sh*t hits the fan.
I did top up on L&G yesterday though with an eye to pick/top up more UK focused stocks. Hard to resist the lure of the dark side when I’m thinking no way we’ll do a no-deal Brexit…
Surely not…
I moved some lumpy equity from a house sale in Australia to the UK. The housing market in Perth was getting softer and softer, and the GBP exchange rate against the AUD offset this. I went for a combination of ISA and taxable Lifestrategy 40, with plans to move it all into the ISA over the next few years. I left our pension Tim Hale inspired portfolio strategy alone. I did however tinker fitting asset classes/funds to the most cost effective platform. My company pension has limited options in fund selection.
Lifestrategy 40 is a magic vehicle whereby interest payments are treated as dividends. This makes it safer to hold outside of an ISA/pension as the dividend allowance is more generous than the interest allowance, allowing you to hold other interest earning vehicles.
Can someone explain to me what hard brexiteers want? If they had it 100% their way, what do they actually want?
From before the referendum, not a single hard brexiteer has said exactly what they want.
What pisses me off in life is when people disagree with something, but do not propose an alternative. I don’t care if the alternative may not actually work, so long at least they think about it and justify it using their view. All this time brexiteers have said they want things that do not mean anything “We want back control”.
Why is it that hard brexiteers only shout but never do anything about it? Why is Boris mouthing up all the time but when asked if he wants to lead he runs like a coward. Why is Dominic resigning after he couldn’t use his position to do anything and he complains only at the end of negotiations.
Why didn’t these buffoons make a clear negotiating plan before triggering article 50? Why didn’t they bring in leverage to the UK by making use of the lack of the ‘EU shackles’ to make businesses want to invest. Why didn’t they figure out possible solutions for the Irish border, and all other known issues rather then begging the EU for ‘Special’ solutions? Why not set up the systems for controlling immigration in a way that only allows talent required in the UK to enter?
If these so called representatives of the people truly cared, why not make Brexit work the way they wanted. Instead all they do is complain and blame and steal money while enjoying their holidays and doing no work at all.
I think most people would agree the negotiations have not been handled well. The Government were clearly not prepared for the outcome of ‘leave’, we had no clear or coherent strategy and I suspect the senior civil servants were left to try and develop the plan as they went along. We have been out-manoeuvered by the EU negotiators and I suspect they have secured more of what they require than we have.
However, for me, the important element in the whole process is democracy. We were promised a vote on membership, it was agreed in Parliament by an overwhelming majority of MPs to hold an in-out referendum and the majority voted to leave. We surely need to uphold this important principle. Upholding and respecting the democratic process far outweighs any benefits from side-stepping the referendum and remaining in the EU.
As for investing, I think the twists and turns arising from whatever comes out of Brexit are unknowable so I stick with my core global multi-asset Vanguard Lifestrategy 60 combined with my satellite global investment trusts. However, I am becoming more and more concerned about climate change following the recent IPCC report which provided a stark reminder of the huge challenges we face which will have far more impact than Brexit and have started to make some portfolio changes to try to address this.
Doesn’t look like a Brexit deal to me. Pity the BBC would much rather focus on emotions and drama than facts. All I see us a set of principles by which the definitive negotiations will be conducted. To go into those negotiations with it pre-agreed that we can’t offer lower import tarrifs than the EU ( not just limiting re-export to the EU), can’t walk away without leaving NI stranded and things like fishery policy up for grabs to be used against us is just daft. Mrs May is a remainer at heart and it shows in this.
That at this late stage it comes as a surprise even to her own cabinet shows the foolishness of going it alone. Get ready for the WTO ( which should always have always been plan b)!
I can’t deny the appeal of Lifestrategy 60, but when I properly looked under the bonnet, I was surprised how much UK tilt there was (home currency bias etc.).
If I was going passive-ish, I think I’d go for something like 60% SWDA (iShares Global Equity) or equivalent, and 40% Capital Gearing Trust, which is my default bond proxy (I wish I could find others I had conviction in). I know CGT has about 50% sterling exposure, but I trust them to monitor it and invest it appropriately.
Of course, John Authers’ ‘Hindsight Capital’ would have put everything into the Odey Swan fund this year, and while I still occasionally contemplate it, I just don’t understand what he’s doing, and so have zero steer on whether 2019 will be when he gets it very right again, or very wrong like in the few preceding years.
I’d probably say the same about BHMG – it’s quite possible the macro traders will have all the right conditions, but there’s so little reporting transparency on it (at least the fees have been reduced) that it feels too much like speculation.
Floating rate bonds? There are a few closed-end options, but I don’t feel that I can honestly say I understand them well enough to have any conviction.
Which means that your enthusiasm for cash and gold makes a lot of sense, except that lead to cash in what currency? A mix of dollar and sterling I suppose for diversification, and maybe some Swiss Francs. But this also means organising foreign currency accounts, or currency ETFs. Investor – it’d be very interesting to know how you hold your cash.
(note that I’ve managed to avoid politics altogether, but then spoilt it by going over-active…).
By luck rather than good judgement I took up your LifeStrategy 60/40 advice just before all this started.
@diy I can’t see how having another referendum isn’t democratic, we don’t vote for a political party once then never again. It seems to me the people who don’t want another referendum just fear loosing.
Hello Martin T.
One (not the only one of course) of the reasons many want Brexit, is to help fight the EUs elite’s extreme (leftist) policy of population and cultural replacement. The unknown economic and financial consequences of Brexit are deemed by many to be a risk worth taking to protect western civilization and values.
It’s not up to the Brexit voters to say exactly how Brexit to happen; that’s what we vote our politicians in for, to make good decisions for us.
And yes, they are making a hash of it.
@diy investor, I would be interested to know what investments you are considering re climate change.
@Fremantle, my understanding re mixed bond/equity funds is that distributions are taxed according the the majority asset class, ie LS60 distributions are dividends but LS40 would be interest. Am I wrong about that?
re Brexit, one thing I find disorientating is that immediately after the referendum, ‘soft’ brexit was taken to mean something like Norway, and ‘hard’ to be something like Canada. How have we moved so far that now May’s plan is considered ‘soft’ ie benign/not Brexit depending on your POV, and ‘no deal’ is now ‘hard’ Brexit, or to some people, the only Brexit that counts. These shifting sands tell us that this will NEVER be over, unless we face down the hard right fanatics stirring up xenophobia/anti EU sentiment in order to unleash creative destruction from which they can profit. And maybe not even then.
My prediction
May will survive a leadership election, there is no credible opposition. Deal is dead in Parliament, Improved Deal impossible in the short term, so we are on a trajectory for No Deal. If the Tories try to avoid a referendum, then a Vote of Confidence is called, and I can’t see the Tories surviving. Labour want a chance at power, even that is implementing No Deal. They will be whipped very hard, and I can’t see more Labour rebels voting against their own party than Tories against theirs, as I suspect there are enough Tories prepared to let the party split rather than have a Brexiteer takeover.
Each party will need a manifesto that either proposes Remain or No Deal explicitly (very unlikely, as so hard to get agreed either way), or a People’s Vote, to get them into power at least. That referendum would really struggle to propose Current Deal, but with a year’s delay might have a got a New Deal. I can’t see any of the 48% Remainers wanting New Deal or No Deal, but plenty of the 52% giving up on the idea, so Remain gets 50%+ on the first count, and the party in power, probably a Labour/SNP coalition, gets to pick up the pieces.
If the Tories offer a Referendum, Labour will reluctantly accept it. The Tories will stagger on in power, and we repeat the scenario above, but leaving them to implement No Brexit, with a new leader from the May faction sometime. If I were Tory or DUP, that’s what I’d go for. They’ll probably be kicked out in 2022, but that a ways off.
So as an investor, I’d expecting a rocky road ending back in the EU, but what I’d be most worried of is a Hard Left Labour government running thing. I’d move more money to foreign equity to try and protect myself, and get in some tinned soup.
@Vanguardfan
I thought that too, but I got this from the horse’s mouth
Vanguard Message Number NCRE-B5PHFP
Dear xxx,
Thank you for getting in touch with the crew here at Vanguard.
That is a great question!
I can confirm that for tax purposes the income received from the LifeStrategy 40% Equity Fund – Income is classed as
dividends.
I hope this helps.
Kind regards,
Nathan
Personal Investor Services
Annual growth of the UK economy is sitting between Germany and France and remember we are still experiencing a growth at a time when in 2016 before the Referendum the Remain campaign supported by the IMF, HM Treasury etc were all saying we’d be in recession.
Germany, Remainer’s favourite economy to quote when it comes to Brexit, is about to announce that it has seen negative growth in the last quarter. Its’ GDP will contract. Two successive quarters of that and Germany, the economy that Remainers tell us we should be in awe of, will be in recession.
Yes, I didn’t want to mention more than my brief aside in the write-up on this, as I was — as much as humanly possible — trying not to get too political.
However I have fairly sophisticated investor friends who are absolutely terrified about Corbyn. For instance I pointed out the fall in utilities in the table above to one replied utilities could be worth zero under a Corybyn regime. I retorted that you have recompense shareholders when you nationalize, but his view is Corybn will introduce measures that destroy the business model (similar to how Buy To Let tax changes have altered that market) and then pay pennies to take it out afterwards.
There’s also a view that this is why Corbyn really wants to be out the EU (which I do agree he probably does) as then with Max Sovereignty he can go to town on this without a higher ex-UK court to appeal to.
I’m not sure how much I agree with all this — he may want this but ultimately his party is not (yet) that radical — but that view is out there. If it’s widespread in The City then UK focused shares could be shot first and questions asked later.
I say all as someone who believes we are probably overdue a bit of a tilt on the dial away from capital and business towards wage-earners at the moment. I’d probably vote Labour tomorrow with say David Milliband or (pre-war) Blair in charge.
Of course with somebody like them leading the opposition we wouldn’t be exiting the EU either, so everything would be different.
p.s. Forgot to add in that kind of extreme Corbyn environment there’s also talk we could see capital controls, which might make all this happy go lucky buying of foreign currencies and assets we’re all assuming we’d do to protect our wealth rather more problematic.
I take the Stephen Covey nonchalant view in the 7 Habits book approach of concentrating on my Circle of Influence, ignore the Circle of Concern. I have a diversified UK/European Dividend Stock portfolio, diversified USA Dividend Stock portfolio and a BTL portfolio. Some of the UK stocks have fallen in value, USA stocks increased because of sterling weakness, no changes in rental income. Assets are zigging and zagging as expected but since I am focussed on cash flow, I have no plans to make any portfolio changes.
Not this Remainer — I like to quote the previous performance of the UK economy, which in a fast-changing world struck by multiple crisis has impressed for most of the past 25 years.
When you think about it, it’s Leavers who don’t appear to admire the UK economy, for all their talk of defeatism. I thought it was doing well at the top line*, and had a great spot in Europe but not in the Euro.
*Not to say there weren’t problems (austerity, deprivation hot spots) but all countries have those and other issues.
@ diy_investor
“I think most people would agree the negotiations have not been handled well.”
The negotiations went about as well as could be expected when a trading block of 600m people lines up against one of 70m. But I’m sure our free trade agreement with Trump will look beautiful, just not for us.
@Martin T
“Can someone explain to me what hard brexiteers want? If they had it 100% their way, what do they actually want?”
A lot of totally different things, none of them possible.
I remember when the Greeks were bailed out by the EU, the government held a referendum on the deal and the population voted against the EU’s terms. The tremor in the financial markets forced the Greek government to accept the EU’s terms regardless.
It’s an example of exactly the hubris that got the UK into this mess in the first place that so many people assume that it is still in the gift of any UK government to do anything else than take any deal the EU offers.
I for one can’t see how Labour can vote for the proposed divorce settlement as it inevitably fails at least 2 of their ‘six tests’, namely:-
2) Does it deliver the “exact same benefits” as we currently have as members of the Single Market and Customs Union?
and
3) Does it ensure the fair management of migration in the interests of the economy and communities?
One might cynically observe that there is no conceivable deal that can pass either of the above as customs union = free movement of people.
And unicorns aren’t mentioned anywhere.
As Claire Perry said on Question Time last night regarding the proposed divorce settlement deal – “this isn’t a letter to Santa Claus”.
So IMHO look for either a crash out, or further uncertainty, and position accordingly (in my case now 40% cash and equivalents)
Re: Dave Datum
In my opinion, that is still a vague want. The world is changing whether the UK is in or out of the EU. If the reason you stated is one the major reasons for Brexit, then I would have expect Brixiteers to propose specific systems that would help achieve whatever exactly it is they want.
The truth is 99.9% of the UK don’t know enough about the EU to make a judgement on remain or leave. The referendum campaign was a joke full of lies from both sides. The leadership and thus direction after the referendum non-existent and a weak opposition with no backbone to decide any clear stance. Maybe this was a long needed correction for the UK’s global power position.
@The Borderer. ‘The exact same benefits….’ Well that was and is never going to happen: two mermaids and a unicorn right there. The dopey Conservatives are letting Labour off the hook at the moment.
The last couple of days have been a fascinating political soap opera, it would just be so much better if I could just an uninvolved spectator without knowing I will have to live with the consequences over years to come.
I enjoyed your commentary on the way the descriptions “hard” and “soft” Brexit have changed over time. The group once thought of benignly as Eurosceptics have turned into the Al Qaeda wing of the Conservative party – desperate to cause maximum destruction in the name of dogma.
In a way the deal on offer is fair given it was made clear from before the referendum that Britain could not keep all of the benefits of EU membership but none of the obligations. The only thing that has changed is that the wide ranging extent of those benefits had become much more obvious.
The only bright spot in the whole story has been Theresa May’s public statement saying the choice was between her deal, no deal, or no Brexit. I just hope that parliamentary procedure allows the House of Commons to consider all of those. After all even John Redwood, a fanatical Brexit supporter, has commented that continued EU membership is preferable to the available Brexit deal.
Of course even if the Commons come to the view that “no Brexit” is best for Britain, they are hamstrung by the referendum result. Cameron’s gimmick was ill-considered, Britain is a representative democracy not one governed by referenda. The Liberals and other advocates of a second referendum probably have the only way out, if it is clear that these are the only available options then if the public want the available Brexit deal warts and all so be it. Like you I suspect that a large fraction of the 52% were voting for the Brexit of milk and honey advertised by Boris Johnson and Nigel Farage rather than considering what it really meant (and no doubt some thought it was all about supporting the NHS).
In terms of investments, I am sticking with LifeStrategy though I am for various reasons also overweight in cash. My thanks to this column which helped with that choice by educating me in the benefits of diversification and indexing.
What is this obsession Leavers have with the fishery policy? (Not saying referring specifically to you or saying you are obsessed @MrOptimistic, just that it always comes up sooner or later).
The total value of the UK catch landed in 2016 was just under £1bn. That’s about the same as the annual sales of Bovis — one of the smaller housebuilders — and many other mid-cap UK companies.
Did Domonic Raab fight hard for the best outcome for Bovis? Did May cite the great outcome for Bovis in her speech about her deal?
She did not. (Oh, and Bovis shares fell about 10% yesterday in the Brexit chaos.)
The fishing obsession smacks of sentimentalism, nostalgia, a lack of understanding about the modern economy, and island thinking to me — masquerading as hard-headed hard-won realism.
Exactly sort of thing I parodied in my Barry Blimp caricature.
@TI. Well you could make a similar general observation about Northern Ireland based on, say, a comparison of populations. Politics and sensitivities don’t follow quantitative logic ( something called Brexit also comes to mind). Just the variousness of people I guess. Fishing also a sopp, definitely not a red herring, for the Scots too perhaps?
If you were a conspiracy theorist, you might say May colluded with the EU to produce the most piss poor deal possible, so poor that it makes having a second referendum and remaining a better option than taking her shambles of a fudge.
Either that, or she and her civil servant (remainer) led team are beyond incompetent. Whichever the case, she will likely go down as the worst prime minister in modern time.
I was a leaver and I would now vote remain because of how badly they fucked it up. There should have been a brexiteer prime minister and led team from the start. They should have bought talent in from the private sector as well, people qualified to handle such matters.
I for one have absolutely no idea what the outcome will be. So I am just standing pat on my passive globally diversified allocation.
What puzzles me is the weird specific things various political groupings and politicians focus on.
The fishing industry has already been mentioned.
In my rural area, farmers seem to have voted overwhelmingly for Brexit to get out of CAP which currently supplies about 2/3 of their income. Asked how confident they are that Gove and his chums will continue this largesse, especially when some of the future FTA’s being bandied about would definitely mean a flood of food from competitor nations and restrictions on some of their current markets, they get baffled and angry.
Then there is May who whenever she mentions Brexit immediately says “stopping freedom of movement and out from under the ECJ” as if these were the defining issues. Is it an echo of her time as Home Secretary? Did these topics get burned into her mind as the way to excite her political base? Has she learned nothing from the Windrush scandal.
And the WTO mob, as if any mature economy actually trades on WTO rules. They also willfully ignore what the actual rules are, and seem to be happy with the Patrick Minford model of abandoning all manufacturing industry with a shrug. I don’t know how accurate it is in its final asessment, but this makes an interesting read https://medium.com/@MrWeeble/who-actually-trades-solely-under-wto-rules-1b6127ce33c6
His conclusion is that actually, only Mauretania trades under WTO rules alone.
Then there is the Labour Party with their 6 tests. It is obvious that the only outcome that meets the 6 tests would be to abandon Brexit, but they won’t say so.
I am tearing my hair out at the number of politicians saying we must have X or it is no deal, let’s just do Y and it will be fine. In some cases it might just about be (at least in the long-term), but the risks are enormously high.
I haven’t heard a single solution that fits our actual econo-geo-political situation. Not one. I am desperate for some kind of leader with some kind of vision.
Aaargh!
@andrew what would a deal negotiated by your dream team look like?
@old eyes, exactly. None of the politicians are levelling with us, none of the Brexit arguments stands up to logical analysis. Jo Johnson has got closest but, boy, what took him so long??
I happen to think that the deal may actually go through. I also think it’s probably the ‘best’ outcome given the self imposed decision to stop FOM. (That incidentally is why the Labour Party is also being expediently dishonest about their position).
I would dearly love to wake up from the Brexit nightmare but I find it hard to draw a plausible line from here to there. Here’s hoping I’m wrong.
But, I think it is also dangerous to contemplate a referendum with no deal on the menu. Surely that’s how we got into this mess – allowing a plebiscite with a disastrous option.
The polls are not nearly convincing enough to suggest that no deal wouldn’t win.
RE: Investments.
I think the most likely scenario in the medium to long-term is uncertainty and the pound going lower. Hard brexit, botched deal and even Corbyn government are all more likely than remain at this point, so I can only see the pound continue to go lower over the next 5 years.
People sitting in cash now are mad. My strategy is unchanged as I cant really know anything for sure. I am funelling my £40k year SIPP cash into a global tracker. My ISA is active share picking (for fun) and my company fund and share account, I’m dripping £15k a month into life strategy 40. When I reach financial independence with £1m+ portfolio I am putting all excess funds from my company into a global tracker.
@vanguardfan – Free trade deal in exchange for the divorce settlement. Maximum sovereignty back.
Everyone keeps warning of WTO being horrific. It will unlikely be as bad as they make out and it might be a worth price worth paying for better prosperity 20 years down the line. Remaining would undoubtedly be better over the short/medium term, or a good deal. This fudged deal appears to be somewhere in between. I’m not really an expert though, just my guestimating.
MPs as a whole do not agree on Brexit, there is no clear consensus and thus the logic of another vote is quickly becoming inevitable.
I am rather more optimistic for UK equities, they are truly hated but not doing that badly…. I think a recovery in UK equities is highly likely in 3 to 5 years, under any outcome.
@HS. John Authers had a good go at explaining why there won’t be another referendum. Now he’s left the FT it’s worth signing up to his newsletters on Bloomberg ( hope that’s alright TI). A general election would be a hoot as neither party could settle on a manifesto position. If that happens, Mrs May won’t be leading the Conservatives. Looks like the French are now pouring petrol on the British fire too judging by Bruno Le Maire. Attitudes and arteries now hardening ?
I sold all my UK equity funds and put 10% of portfolio into gold the week before the Brexit vote, which worked out ok but this time round it is a tough call. Literally anything could happen.
I have more of a UK bias now with a chunk of mainly large cap UK equity, some UK commercial property and some GBP corporate bond allocation, with a short dated bias. And some in cash. But international equities are still my largest single asset class. Incidentally if you thought the GBP was going to soar due to a soft or non-Brexit then the FTSE250 would be the way to go over the FTSE100.
As for the deal, how can you possibly please everyone given the divide? Its impossible. It could end up being the least worse option.
Surely better than a cliff edge no deal.
May could possibly have got it through before losing seats in the last election.
@andrew can you elaborate what you mean by a free trade deal? Covering goods or services as well?
To my mind (not expert either) it seems apparent that if we want to trade freely into the single market then we will have to accept common standards – ie something close to what May has negotiated, being a rule taker in exchange for tariff free trade in goods. Surely our current free trade deal, with influence over the rules, is vastly superior?
Investing – I’ve changed nothing, except to resolve not to look at my accounts….
Seriously, I though the fundamental point of index investing was that it’s impossible (for most people) to predict or outsmart the markets, and you diversify widely because of that. And that the hardest but most important part is to sit tight through turbulent times.
Or have I got that wrong?
@vanguardfan. We would certainly have to abide by their standards if we wanted to sell to them, and accept their standards for our imports. The EU is quite protectionist so there could be substantial room to get better suited agreements with the rest of the world ( eg remove restrictions on NZ lamb – note that this is just an example and not evidence of a lamb and fish obsession). However, the rules tabled seem to forbid setting lower import tarrifs than the EU, even for strictly bilateral trade, ie no re- export allowed.
@Andrew. I’m not sure staying in cash as this point is “mad”, as it depends on where you are in your investment journey. But if, like me, you are FIRE’d then why risk anything?
Worst case is erosion due to inflation. I can live with that for a few years.
Compared to a 50% (might, could be) drawdown as a sequence of return risk is actually a no brainer for someone in my position.
It’s always horses for courses.
Me?
Just bought a house with the Brexit driven benefit of not having to fight over it with other buyers and indeed at a lower price. Thanks Brexiteers! I’ve also fixed my mortgage rate for 5 years because the market looks wobbly and I doubt it’ll go back to the crazy performance of the past two years post Brexit.
As to what Brexiteers wanted, here’s a list:
– Get back at Cameron
– Get back at the “Elite” (Moggy is not part of it apparently)
– Go back to the olden days.
– Less brownish neighbours around.
– Less poles too
– Bendy bananas
– Chlorinated chicken
– £350m for the NHS…
-… to pay for non-forreneir nurses
– resuscitate manufacturing and compete against China…
– while earning a first-world salary (good luck with that)
– Send Spaniards back to where they came from because too many immigrants…
– while emigrating to southern Spain without speaking the language (of course they are expats not immigrants there!)
– Trade with the world free from the yoke of the illuminati lizard overlords in Brussels.
“You’ll also have felt it if you’ve holidayed abroad” and it gets even more interesting if you’re moving lock, stock and barrel to the Mediterranean. So far my approach is exactly this – “The good news for well-diversified passive investors is they needn’t do much, if anything.”
That active investing lark sounds very stressful. Does Brexit seem worse to you than 2008? Then, my actions were to buy actual gold and non-perishable goods (seriously! – if I’d been American perhaps I would have bought guns and ammo too). My only investment, a solitary Jupiter Pep (financials), tanked. Now we’re better positioned, passively largely global, and dripping into LS60. We can’t affect what’s going to happen, but most people here will be able enough to deal with the aftermath.
PS. The gold and the financials made some nice returns eventually…
@ Martin T “Can someone explain to me what hard brexiteers want? If they had it 100% their way, what do they actually want?”
Many of them prefer no deal at all, in order to get as far away from Brussels as possible. That makes selling the virtues of any particular deal to them a fool’s errand. Given that the EU is our largest trading partner, you may ask “but what will they and we eat?”. The answer seems to be that they do not care about such small practical details. I was actually told by one today that “Brits do not want to be well-off; they want to be free”. Good luck with that argument, you may say, but if there are sufficient of these people in the Commons to block May’s deal, we are all, repeat all, in large amounts of economic fertiliser.
Portfolio-wise, my allocation to UK equities is at its lowest ever but it could still hurt if Brexit ends in “no deal”. The foreign portfolio (and the large cap element of the UK portfolio with its foreign earnings) is vulnerable to the opposite scenario where Sterling strengthens because we escape from the bear trap. I have tried to pop as much as I can of the currency-exposed element into GBP-hedged funds but this covers only 30% of the at-risk amount. So, do I feel well-prepared from these actions? Not really. More importantly, the overall level of equities in the aggregate portfolio is now very low for me, at 45%. And so, if all hell breaks loose (ie if Parliament forget who they work for and vote May’s deal down), then I will be like a kid in a sweetshop and buy up whatever is left of the UK.
Politically, I have become cynical. I used to feel the benefits of democracy, linked with a sense of the wisdom of crowds. I sense that the system is broken and do not like going to sleep fearful that another detached part flying off the machine might clobber me in the morning. But we shall see what we shall see – because that is all we can do. Perhaps there will be enough MPs who will remember that there is a real world out there, dependent on their vote. Or perhaps they will send us into recession and strife. Anyway, may God may have mercy on us all.
As far as investments go, as a mostly passive investor have not changed much in response to Brexit. One response was to reduce my sterling exposure a bit and shift cash and fixed income assets into dollar and euro. This is partly a hedge because I expect future expenses in other currencies. It is also partly a reflection of the asymmetry of risk involved from my perspective: if things turn out well and the pound appreciates I’d more happily take a portfolio hit than when things go badly. (I have also moved some of my investments to brokers outside of the UK, as a completely different step of diversification.)
The one things that looks certain about Brexit is that uncertainty about the outcome is going to be with us for a long time (with the quickest possible decision probably in case Brexit gets cancelled, but even that would take a while). So I have delayed a new house purchase in the hope that house prices will continue to fall, irrespective of the final outcome of Brexit.
I am always slightly amused that so many UK investors view a Corbyn government as their worst case scenario (whether because of possble nationalisation, or increased taxes such as the introduction of a wealth tax). Far worse can happen and has happened in Europe in our lifetime (and certainly my grandparents’ lifetime) – I like Bernstein’s descripton of his “deep risks”. (And personally I fear Brexit might end up a lot more damaging than a Corbyn government.)
Outside of finances, my most important response to Brexit was to make sure that everyone in my household holds both UK and EU27 passports – I consider myself fortunate in that respect.
Brexit is all noise looked at this closely. It’s a 20 year process and we’re getting hourly updates. How long did it take the US to really establish itself after its (decidedly hard) exit from the Empire?
The joy of the noise, however, is some pretty wobbly volatility at last. Good for a bit of rebalancing premium if it goes on long enough. Woouldn’t mind gold taking a bit more of a hammering before the apocalypse comes, however, as feeling under-exposed there. We seem to have dodged a proper rout so far, though.
Global diversification looking smarter than ever. (@tom_grlla – I settled on agbp as a bond fund). Frankly I look at my old self and wonder how I could consider myself serious and hold any ftse100 exposure: it’s now in the same bucket as the dow jones for me — ie good for reporters, not investors.
How did I manage my investments? Well moving to NZ 8 years before the vote then liquidating most UK assets to help pay for a house in NZ 2 years before the vote may count as prescient but really coincidence not causation. Still have a small amount in a number of ITs – but with mainly international exposure as most are…..although City of London is down quite a bit – even accounting for changes in exchange rate.
The whole Brexit thing has been simmering for 2-3 decades, nurtured by Lisbon and Maastricht and trivialized by many commentators unable to grasp the disparities in experience and perspective across the country (as a Brit/Kiwi can I say that still?) and the desperately poor campaign run by both sides – even with one side getting government support! Add the routine failure of our ruling classes (with one or two notable exceptions) to inspire confidence in any endeavour, not least negotiating an exit from the EU, and we are up dais creek with no locomotive device. Even from afar, my perception is that those more in favour of exit than remaining are not in the majority in the government, opposition, the civil service or in the Twitterati and so the suspicion exists that they didn’t really try……
As for WTO rules I was inspired to check through NZ Tariffs and find they are incredibly low (5 or 10%) for some products only not overruled by WTO/FTA agreements – as much a free trade environment as any nation state (if I’ve read the tortuous redacted documents correctly). And NZ manufactures bugger all except lamb, beef, milk products and lumber. And we’re doing OK thank you. So it is doable………
My view – the Brexiteers are making lots of noise against May deal but when it comes to the vote they will fall in line. They must be acutely aware that to not do so will very likely kill Brexit as no deal will inevitably lead to a referendum and having victory in their grasp now would they risk it all for a referendum that has a high likelihood of reversing the last vote. May deal just kicks the can down the road, giving them the opportunity to continue looking for max exit or whatever their view of Brexit is. The text appears to state a new deadline of 2020 and probably one more after that. So plenty of time to fight and argue over what real Brexit looks like. Even Corbin may fall behind it, as I think he wants to leave and if it moves to general election or referendum it may be worse for his plans. Better to wait for the next election, esp as the outcome of this deal is pretty much status quo for now so I can’t see him sweeping to victory.
To be honest, I don’t think the government could do any better than this really, so it is not a bad deal. It is really the only deal. But if you think about keeping everyone happy, it is arguably a good deal. A trade deal was never going to happen in this time period. They have got through the first phase, agreeded the divorce, protected the economy to an extent (transition but still lots of uncertainty) and bought time to deal with the next phase. Of course it is hard to see them putting the round circles in the square pegs in 2020 or beyond, but I suspect both sides will find a way. After all, the EU could have really screwed us if they had wanted and they didn’t – ideologically I don’t think they want a weak Britain with the rise of Russia and China.
Just my thoughts.
As I read it, the proposed deal has the potential to keep the UK in a highly unfavourable position indefinitely. We can’t exit from it by choice but would rely on the approval of the EU which may make its consent dependent upon reaching agreement on securing frictionless trade across the Irish border. Effectively the whole of the UK is locked into a customs union with the EU, on subordinate terms, until a solution to the border problem is found. It appears that this will apply even after the end of the transition period. This doesn’t look like a great idea to me, in fact I’d go as far as to say that as and when this point becomes more widely appreciated (assuming I’m right) it has the potential to kick off some pretty serious political ructions. Again. From an equity investment perspective it’s difficult to see any option other than international diversification at present.
Buying global assets (via a global equities tracker or otherwise) is yesterday’s call. One where sterling was at 1.40 – 1.60 to the dollar.
I feel there’s more upside to sterling than downside i.e. on a good outcome we’ll see it back up to 1.60 (up 30 cents) but a no-deal may see a drop to 1.15 (down 15 cents).
So I’m buying UK smallers (FTSE250 tracker, Brunner IT).
Time will tell.
While I think this is overly confident as I see things, I do lean this way too, especially on a medium to long-term view. Hence why as I mentioned I’ve made all these forays into UK focused shares, only to scurry out again with mostly small losses and the odd small gains.
It’s also why most of my cash and short-term bonds is in sterling right now. Add my property to the mix and I’m trying to strike a balance against my overseas exposure, and with the ability and mindset to move very quickly if the picture clarifies.
(Personally I’m not really sitting in cash, I’m more waiting with cash. As an example, in my portfolio I went from around 15% cash in early October to near-zero portfolio cash (still had short-term bonds, prefs, etc) and then back to over 20% now again over just a few weeks. Now THAT is active investing. Please please don’t try it at home. It’s a long-term carefully tracked and benchmarked experiment by an investing maniac.)
People saying it’s not worth worrying about or that Brexit is noise… perhaps true if you’ve got a properly diversified passive portfolio, with the proviso that currency is a big deal and that on some great resolution for sterling the overseas equity portion of your portfolio could easily fall 10% and not very inconceivably 20%, overnight. That’s a big drop that could happen over a period of just a few days.
Of course it would just give back the windfall gains we saw following the Referendum. So swings and roundabouts over the medium to long-term. But it will feel pretty bad when it happens. (Nevertheless I don’t think most people should try to act ahead of it, especially if you own your own UK home that comprises a fair portion of your net worth. I think passive investing with mostly global shares and UK bonds and getting on with your life is exactly the right thing to do!)
For active investors, for their sins, it’s a big deal. Get currency vaguely right (there’s little chance you’d get all of any 20% currency reversal gain except by being riskily positioned beforehand, in my view — I think in a No Deal crash out Brexit the cable rate could reach parity, conceivably) and add another whack from exposure to UK assets and a UK focused chunk of your portfolio might rise 30-40% or more very quickly, versus had it stayed in overseas equities. That’s massive.
But as I said above in my piece I personally am not at all confident which outcome we’re going to see, hence wide diversification and waiting with a flexible mindset.
@PendleWitch — Yep, somewhat exhausting, although it was less so when the chess was more 3D than 4D (i.e. when the pound wasn’t such a wildcard). Also helps when shares are going up. This way of life is really not something I advise, not even because most will lag markets horribly but because it consumes a lot of energy and time. I do it because I still find it fun/challenging, just about. When I don’t I won’t. 🙂
@Investor
I think cash always has a place for an active investor. More than usual, right now it depends on what currency you’re in.
The biggest wealth determinant in the next 6 months will be correctly calling cable. Parity is a bit extreme, but a 15-20 cent move (up or down) is likely. So long as I remember this is more gambling than investing, and not risk too much, I should be safe.
@TI. Indeed so.
@Chrisb. Why Brunner? Last time I looked it had a wide spread and stock overhang courtesy of Aviva. Neither that nor the FTSE 250 are my idea of small stuff. If you want to go the whole hog, Aberforth or Caledonia perhaps? However in this climate who knows!
In these three years I could have learnt French, or done something more useful with my time. What a total waste of time it is for everyone.
In terms of my portfolio, to my dismay Morningstar tell me I have 24% of my portfolio in the UK. I remember thinking years ago that the UK was a safe environment and that it’s unlikely anything dramatic could happen to the economy or political institutions…. Then came DC and the Tories. The bastards.
24% is way too much for a potentially semi-failed stated, but I’m not keen on selling and rebalancing into other funds at the moment. Nothing to do but sit it out and reinvest GBP dividends into those of other other currency funds (unless GBP really gets really stupidly devalued in coming years). Who knows what will happen. I just really hate Brexit – that’s my only certainty.
Even neutrals on this issue would point out that those currently steering our lives on the ship Dis-UK couldn’t organise a piss-up in a brewery. (based on just the one proven fact of that arrogantly needless, election own goal) But to be fair, assembling the best experts in their fields, to deliver a self-replicating cake wouldn’t work either, as it contradicts the laws of reality that decide life on this planet.
A good lesson a civilised country would learn from this is to optimise the political process whereby dissenters have to come up with their own plan instead of just chanting ‘No’ to the suggestions of others like a parrot could be trained to do. There should also be enforcement of laws against blatant lies to swing votes, as it is agreed for advertising to consumers for example; fraud means fraud.
I’ve never had this much in cash and would increase it if liquidity allowed, the intention being to shift into $US, Euro, Swiss franc and a couple of other safer currencies just in the short term. I can’t see how it can be a higher risk to have more options and even if I lose a bit if switching back, that’s an acceptable price for peace of mind, like insurance. Two hits already taken are a void period on a BTL that wouldn’t sell other than for firesale prices and the entire P2P experimental end of my portfolio spectrum sinking a little lower below the waterline every day. If in 2 years racing towards a cliff edge, that couldn’t change anything, I don’t see why it would now; those who don’t believe in cliffs have to crash before they accept it can happen. For the rest of us, most are not able to insure against the damage, so can only brace ourselves while still hoping for a (non-unicorn) miracle to save ourselves. Vibrant times.
@MrOptimistic
The theme is to focus on domestic equities that haven’t been inflated by their international earnings. More of those in the FTSE250 than in the FTSE100. The theme wasn’t to go smallers (or micros) for the sake of it.
On Brunner – good spot – bought for different reasons: First, it really has a ‘steady and dull’ portfolio which might be what’s needed as this bull market reaches its end. Second, the managers have been around for a long time so should have experience to see us through that turbulence. Third, this year it repaid its very high debt tranche (which has been a drag on performance and helped sustain a very wide discount) with much cheaper debt so that should improve relative performance. Fourth, these reasons combined should see the discount tighten.
@ChrisB @MrOptimistic — I’m confused by Brunner in the context of “UK smallers” too. The artificial overhang / debt part is interesting and I may research, but the actual holdings seem to be large cap international? Which is fine but not UK smaller? Or am I missing something? 🙂
Funny, there were supposedly such complaints about the political aspects of brexit hijacking the agenda of this website, as if that wasn’t relevant, but once the shouty-types have no excuse when the articles are separated, in this week’s first; then at this point the ‘interest-score’ is 6 comments on the neutral weekly round up vs 56 on brexit.
One might say that the majority aren’t disinterested at all then, far from it, logic suggests the aggression to shut down that conversation is simply an intolerance of other opinions.
@TI — you might view global stocks as an unhedged currency risk, but isn’t it a hedged future consumption position? I look it as a way of “stepping off the crazy-a-bout” for a while. Leaving it in cash (ie sterling) would appear to be placing a massive bet by comparison. Obviously all assets are a position or sorts: once you have wealth you have exposure.
If sterling tanks then I can expect my cost of living to go up over time as globally produced goods cost me more. If it recovers miraculously then I have fewer pounds but they buy more stuff so I’m happy. Only problem is with domestically produced goods — the most important to me being UK housing which I’m longer than I need to be already, and I believe will move more than sterling in any case — I’m not sure I need to personally consume more financial services, or aerospace/weapons tech. Besides, if that recovery of sterling is linked to my country not being quite as buggered as it looks like it’s going to be, then I’ll take a little less wealth as a trade-off for a happier life!
That said if you’re moving significant fractions of your portfolio in and out of cash then you might be more tuned into the “noise” wavelength than I am. As a passive investor, I try to avoid checking whether I need to rebalance more frequently than once every five minutes (ie about every time we change Brexit minister)
Haven’t changed a thing, and and only look at it occaisonally, anyway. Vanguard Life Strategy 60/40.
Global stocks *are* unhedged currency risk. 🙂 But I agree it is a risk worth being exposed to for multiple reasons.
Regarding future consumption, spending is made up as you know of both goods and services. I’d agree that once you’ve bought your house most of your spending on goods is going to come from overseas (whatever the ‘grow it/make it at home’ brand of Brexiteers believe, in diametric contradiction to the opposite view of the ‘global buccaneer / Singapore’ Brexiteers, both of which groups claim the Referendum and the 52% spoke for them. 🙁 )
Still, a significant amount — for some frugal minimalistas maybe the majority, after a home — is going to be spent on services.
That’s also where the long term inflation is too.
Services is everything from school, medical, and legal fees to hair cuts to going to a restaurant, where the (imported) food only makes up a small amount of the bill. And of course care home fees, unless one plans to retire / die abroad (in which case most of the equation is different.)
Also, you’ve said “cash is a massive bet” but as ever I am not talking, clearly and as stated, about me putting everything in overseas shares or £ cash or anything else. As I stressed, I am widely diversified. A “massive bet” is one thing if it’s 100% of your portfolio. It’s diversification and risk reduction if it’s a component of a broad spread of assets.
But really we’re not disagreeing so much as playing a different game.
I went into more detail than usual in these comments to give some context about my active investing. I hope I have something useful to say about the background to my thinking and positioning, that might inform others. I definitely don’t think all but a handful of our 5-10K+ regular readers (probably less than a dozen at a wild guess, informed by years of reading comments) should consider investing anything like I do, and even then only if they enjoy it.
This is among many reasons why I rarely write about the specifics of my investing/trading style. It would be unhelpful and potential damaging.
Most people should not be investing / liquidating six-figure sums on a timescale of days or even hours, whatever their level of wealth. Time may yet tell that includes me, though I have some confidence from my tracking that I can keep indulging in this activity for now. 🙂
Edit: Added “long term” to clarify my thinking there. Recent spikes have been weak pound import driven mostly, as you know. 🙂
@Richard ” the Brexiteers are making lots of noise against May deal but when it comes to the vote they will fall in line. They must be acutely aware that to not do so will very likely kill Brexit as no deal will inevitably lead to a referendum and having victory in their grasp now would they risk it all for a referendum that has a high likelihood of reversing the last vote”
I think that is on the money. While the hard Brexiteer people like to excite and agitate their supporters by claiming different approaches to a “deal”, all the ones commonly referred to have the same flaw which is that the EU will demand its backstop (the main point of contention). So it looks like it is “vote for May’s deal or face a second referendum” which the hard Brexiteers would quite likely (but not definitely) lose. I am assuming May will try to legislate for a second referendum if the Commons turns her down twice). She obviously cannot acknowledge such a plan now.
I think Steve’s prediction is realistic. The more pragmatic Brexiteers among the Tory party will return from their constituencies on Monday having discussed possible courses of action ad nauseam. They will realise that a declaration of No Confidence in May has little chance of success (seriously, is there any credible alternative in that divided party?) and that voting against her deal creates the likelihood that the undesirability of No Deal will leave a “peoples’ vote” as the only outcome.
But it is still possible the arithmetic is against May and her deal won’t carry the vote. Whips will be working overtime.
One of the saddest things over the last two and a half years is that Labour have not proved an effective opposition. Corbyn has scored a few debating points, but ultimately has shown that Brexit is not really something he cares about. (In my view he is a two issue politician uninterested in the bigger picture: he is still fighting the Clause 4 battles of the nineties, and has been a lifelong advocate of Palestinian human rights which is a worthy cause but has led to reputational damage when criticism of actions of Israeli governments has allowed the party to appear to and perhaps actually tolerate wider anti-Semitism). If the party had a coherent view on Brexit they could have run rings round May. It is a pity that the Liberal voice is so little heard after their collapse in 2015, at least they know what they think.
@Steve @Jonathan
All very interesting. But how is this relevant to FIRE or personal finance?
I have been watching the Brexit shenanigans with amusement. The best bit was when Jacob Rees Mogg declared that the Tory party was full of talent and proceeded to list names with David Davis and Boris Johnson at the top of the list.
This year I moved heavily into cash and alternatives and out of bonds and equities. Returns since 2009 have outperformed my forward liability curve, so I can afford a few years treading water. Now is not the time to snatch defeat from the jaws of victory. We’re late cycle, so I’d probably be doing this anyway, but Brexit gives it an additional impulse.
In terms of hedging Brexit itself, the currency seems the most effective vehicle. My aim at the start of the year was to end 2018 long GBP/USD volatility and long the tails. To lose smalls shorting central probability outcomes to be leveraged long the probability of both tails. So I’ve used the ebb and flow in GBP/USD between April and Aug (1.43 to 1.27) to buy large payouts in 1.21-1.25 digital puts and 1.38-1.42 digital calls for late April 19 expiry. For every unit of premium I lose between 1.25 and 1.38, I make about 40x this if GBP/USD is below 1.20 and 20x if GBP/USD is above 1.42. The topside hedge will neutralize my foreign currency exposure if GBP/USD rises in value on a “soft Brexit”. On the downside it will be a massive windfall gain to hedge against a host of potential unknowns; a sum that will now go straight to my childrens’ inheritance in a tax-free, offshore trust. Monetary compensation for a decision they had no ability to influence but which will have a major influence on their lives.
@TI speaking of cash, I’m curious if you kept your flat funds in cash before the purchase and how far in advance, time-wise. I am, which (combined with emergency cash) leaves me 80% in cash for the time being.
Brexit has already done it’s worst on my finances as I was in the process of leaving the UK at the time of the referendum, and took the whole currency fall on the chin. I have been keeping an eye on the £ this year, trying to time some transfers back to cover voluntary NI payments as favorably as possible though that is now complete. I continue to observe Brexit from the perspective of someone who would like to return to the UK one day and wonders what kind of society it will be.
As a passive investor with a longish time horizon, I haven’t looked at the figures. But I usually rebalance around the end of the tax year – I’d be selling bits around Brexit date. The timing is a bit unfortunate.
The main impact though for me will be losing my job and career, I think, as they depend largely on rights linked to free movement. I’m waiting to find out when free movement ends. What I need is to make sure my torrentially rainy day savings are well stocked if I can. Since the referendum I’ve been making an extra effort to tighten the belt.
Jonathan raised the Labour party stance. A canvasser came to my door the other day, wanting to know if I’d vote for them. I said I was “concerned” about Brexit. His response: Are you a leaver or a remainer? He wasn’t going to start his pitch until he knew. I had this the last time I was canvassed, too. It’s all things to all people.
@all — Gordon Brown wrote an interesting article on the FT yesterday — in Saturday’s links post under Brexit. He cites several things other countries do to moderate some aspects of EU integration (free movement) that we hear little to nothing about here. Not sure if they’d be dial changers; the lack of awareness/implementation is notable though. I guess it was politically toxic to talk about limiting free movement pre brexit, which won’t have helped.
@TI – appreciate the clarification on cash. I’d hate to be caught with 25% portfolio in sterling when news of the PM being replaced by a hard Brexit clan breaks! I suppose your wheelin’ and dealin’ is always going to see some large temporary cash balances from time to time. I suppose my point – most succinctly – is that cash is an investment choice too.
On GB’s “limits to movement thinking”, the thing that most EU countries do to limit inbound immigration is not speaking the world’s most popular second language as their national tongue. The fact that EU couldn’t even throw a little sop in that direction back in May 2016 when DC asked for a concession is arguably the straw that broke the camel’s 2%.
@Mathmo – I made this very point to a Dutch friend when I asked her how many countries taught Dutch in schools. She was strangely silent.
@Mathmo, @Brod, @TI
– No, at the time of ‘Enlargement’ (the 2004 incorporation into the EU of the eastern and central European countries of the former Soviet bloc, which by the way was strongly argued for by the UK against the reservations of some other member states) the UK Government chose not to adopt various restrictions of/mitigations on the free movement of those countries’ citizens that were available and were in fact adopted by other member states. So we have only ourselves to blame on that score. Also, rates of migration between member states ebb and flow as the economic cycles shift between the states. I’ve heard it said by economists (I’m not one; so I don’t know how sound this view is) that because of this, rates of inward EU migration would have started falling after 2016 even without the referendum result.
@TI
You mention this on your post:
> I think I’d put everything into a Vanguard LifeStrategy 60/40 fund the day before the Referendum and not look at my portfolio until this is over!
That’s, more or less, what I have been doing. I started as a passive investor a year and a half ago and slowly built up two portfolios inside an ISA.
One of them is on Vanguard Lifestrategy 80% Acc with a YTD return of 0.19% https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-80-equity-fund-accumulation-shares/price-performance
The other is on Vanguard Lifestrategy 60% Acc with YTD return of 0.15%
I might have been unlucky with when I’ve done some of the contributions as my returns are slightly worse than that.
Anyway, I’ve learnt the mantra. We are on this for the long run.
A question(s) I’ve always had in my head: does it make sense to own both? should I just have one of them (based on how much risk I feel like taking)? should I use a different fund instead of Vanguard so that I am not exposed to them?
PS: I am not prepared to build my own portfolio from scratch so I was happy with the concept that these funds offered me
PS: the reason I run two… mine and the wife’s
2 points on Brexit 1:
1) the oft-forgotten irony that the referendum was because David Cameron wanted to end the decades old internal splits on Europe in the Tory party and to counter the rise of UKIP. Didn’t exactly work for tory unity did it….. Let alone the rest of the country.
2) Economic factors aren’t key for a large proportion of Brexiters, which is why there hasn’t been a real reversal of opinion. Because for many it was about identity and immigration (latter being connected to the former). The oft cited “taking back control of our borders”. There’s been zero debate around it and the politicians continue to kick that can down the road, not least because immigration levels won’t be materially affected whatever controls are put in place as the UK fundamentally relies upon it.
Based on reading financial blogs, including Monevator and the excellent JLCollins NH stock series, my investing strategy a few years ago became to sell my assorted active funds and random trackers and invest everything in Vanguard Lifestrategy 80:20, keeping the money I need to feel mentally comfortable aside in a cash ISA.
I then switched from HL to a cheaper platform, and forgot my log in. I should probably find it, but as I get emails confirming transactions, I’m sure the money is still being invested every month and none is coming out. I’ve no idea what’s happened to my investments in the last few weeks and can’t actually be bothered to look, because I’m not going to do anything about it, because I don’t know what to do (and neither does anyone else).
I’ve no idea what current Brexit plans means for investing, and theres at least a 50% chance that any change to my ‘strategy’ would make things worse, so I’m doing nothing.
I find finance and investing articles interesting, but nothing I’ve read has convinced me that I could do better. Interestingly, my partner reads most of the same things I do but has taken the opposite approach.