My Secret Investment Plan For Surviving And Thriving After Brexit

27th Jun '16 by UK Value Investor

8 comments 8982 reads

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…

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Cuthbert C

27th Jun '16

It's very refreshing to read a sensible, logical comment on investment in the real world as it is now, as opposed to the ramblings and rantings of fantasists and those in denial on both sides of this sadly polarised argument.

I am, however, not at all sure why the originator of this thread is opposed to exiting the market and using cash as a temporary means of avoiding market volatility. Of course cash is exposed to currency volatility but it is relatively safe from the other fluctuations which follow events such as the OUT vote.

As reported elsewhere on Stockopedia, I sold my entire portfolio before the referendum specifically to mitigate against the losses that would accrue following an OUT vote. I haven't calculated the value of the losses which have been avoided by this very simple measure, but it is pretty significant. I can't for the life of me see what is wrong with taking this approach. Had the vote gone the other way, I would still not have lost anything - I'd have missed an opportunity but that is very different from making an actual loss - and avoiding loss is a major objective.

Advocates of LTBH and ignoring market timing often say that if you had missed the 10 best days in the stock market over the past 50 years (or some such set of figures) then your returns would be paltry compared to those who stayed fully invested.

But the counter-argument is equally true. If you miss the 10 worst days then your returns will be significantly enhanced.

Or am I missing some insight here?

UK Value Investor

In the end the decision to move to cash or stick with investments through thick and thin is a personal choice and I don't have anything against event-driven strategies, but I would say that most investors, including me, don't have the ability to consistently profit from making big asset allocation changes in response to specific events.

Aside from the difficulty of even-driven approaches, I think there is a slippery slope risk, where an investors moves to cash because of a big event such as this referendum, but then gradually begins to tweak their asset allocation based on possible exchange rate moves, GDP figures, employment number and who knows what else.

I just don't like that sort of nimble-footed event-driven investing and I don't think most investors can carry it off successfully.

However, those who can consistently profit by making event-specific decisions should probably keep doing it, but I think they are in a minority.

Alanjames999

2nd Jul '16

Nice post, I'm not sure if i like the 100% allocation in stocks though.

Having an allocation in International bonds and precious Metals ETFS kept me sane during the Brexit.

melody9999

I agree with most of what John says but I have one over-riding polcy and that is: to sleep easy at night. As a small cap investor, when the market is volatile I adopt a view that cash preservation is most important to help me sleep. So I move more into cash. Then I wake up thinking 'I'm not bothered which way the market moves today'. If it falls I have cash available to buy in at lower prices...if it rises well I am making money. .

The other advantage of this strategy is that if we do have a serious retracement eg the recession in 2007/8, rather than hanging on "surely the market cannot fall any more?".....I am moving into cash consistent with my 'sleep easy' factor.

So how did this work in practice? In 2007 I lost 20%, was completely in cash for a while and then increased my porftfolio by 60% in 2008.

And at present I am 33% in cash - sold / reduced a few positions early this week. Most of those stocks are higher now. But.....I am still sleeping easy at night.

Brilliant Leader

That's a great point melody. Volatility is great if you are short-term trading but I have more of a buy and hold mindset. Apart from having a day job, I travel extensively and therefore, am often not on the same time zone. The ability to sleep and travel without undue stress is very important to me. When there is less volatility, I am happy to be fully invested and rely on stock picks and portfolio balance but the current global situation seems to me like we are in for a period of extreme uncertainty and therefore, volatility.

Prior to Brexit I was holding around 58% cash. I have since taken a fairly sizeable position in a gold and silver producer and fortunately so far, my equity holdings have risen 12% this week. I am now 54% in cash and have identified a focused group of quality companies that I want to either buy more of or build initial stakes in. I regard these as "strategic holdings" - companies that I am happy to hold for 3-5 years, with resilient, growth business models, solid financials and in the main, dividend paying. My plan is to drip feed my around 24% of my cash reserve into these shares over the next six months. My thinking is that whatever the volatility and whenever it occurs, if I "buy the dips" I should end up with a solid core portfolio bought at a reasonable price.

Of the remaining 30% cash, my plan is to buy a range of high yielding shares, of which I currently have a watchlist of around 15 companies. I plan to keep that cash on the sidelines in anticipation that there will be a major market correction at some point during this restructuring of the global economy. I don't know what the trigger will be; maybe Article 50, a surprise general election, machinations in the EU, US election, currency fluctuations or some other major event. But with so many significant known unknowns on the horizon, I am convinced there will be a correction at some point. For me, it is less about the headline indices and more about the yield that I can buy in for, hopefully selecting companies that are unlikely to cut their dividend.

I'm sure investors who are more active can trade some of this volatility to good effect. That's not me, so my strategy is aimed at profiting from these extraordinary events while sleeping and travelling soundly.

WarrantStar

I don't think it's sensible to be 100% in or 100% out of the market before big events which are well sign posted.
I believe that it makes more sense to:
1) Weigh up the probabilities of the potential outcomes. In this case IN or OUT.
2) Consider which companies would be likely to benefit, and which would be likely to be adversely affected, by each outcome.
3) Trim your portfolio accordingly, leaving a proportion of your portfolio in cash, so as to be able to take advantage of opportunities as they may arise after the event.

Rusty2

3rd Jul '16

Interesting article but I may take a slightly different view, how about going less diverse and reduce exposure in some sectors. I'm selling some smaller companies and buying large companies with good dividends. I will have some in cash so I can buy at short notice. I think if you are fully invested you always have that dilemma of what to sell, I know I missed some opportunities last year because I did not have any cash.

I believe John has most of his portfolio in large caps.

14th Jul '16

My point about being 100% in stocks is a bit misleading on reflection. It refers to me and my specific risk tolerance and is obviously not appropriate for everybody. Here’s how I actually think about how much of an overall portfolio an investor might want to have in equities:

First of all, as a rough rule of thumb you should expect to see equity markets drop by at least 50% on several occasions during the typical investment lifetime of a decade or three.

You should then think about how much of a drop in the value of your portfolio you could stand before panic-selling and making a dash for the apparent safety of cash.

For example, if the biggest peak-to-trough decline you can stand is 20% (which would indicate that you’re a relatively risk-averse investor) then it would probably be a good idea to have no more than 40% of your portfolio in equities or other volatile assets.

That’s because a 50% decline in the value of the value of your equities (which make up 40% of your portfolio) would produce a 20% decline in the value of your portfolio as a whole.

So in a really bad 50% bear market you’d only see a 20% decline, assuming that the remaining 60% of your portfolio was in cash or some other fixed or non-volatile investment.

An investor who could stomach a 40% decline would have limit their stock market exposure to 80% and so on.

Hopefully that makes my position on equity allocation a bit clearer, although of course there are a million other ways to think about asset allocation.

My secret investment plan for surviving and thriving after Brexit

Point 1: A vote to leave the EU means more uncertainty

Point 2: The future was, is, and always will be, uncertain

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UK Value Investor

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