Brexit is all over the news and opinions are flying in every direction… so just what is the reaction for value investors? We recommend buying and diversifying.
Brexit, which was the publicly voted for United Kingdom referendum to leave the European Union, has thrown the world’s markets into chaos. The UK’s markets in particular are a whirlwind at the moment, and most sectors have seen sharp drops in their stock prices. As The Telegraph explores in this article, the “pound went crashing below $1.30 in early trade, falling by as much as 1.95% to $1.2798 - a level it last hit in June 1985”. This could be a worrying time for investors.
But, as Scott Nursten (CEO, STRIDE) explained in my last blog, value investors should seize this opportunity. In his parting words of our interview, he recommended that investors find "great companies and buy them cheap. If anyone thinks that - in the long term - there won't be a housing market on a small island that is one of the financial power houses of the world... then they're delusional". Reviewing the intricacies of what value investing is, it seems he’s right… but there’s also something to be said for diversification.
Answering Brexit: Buy and Diversify
Why Should I Buy?
In short, because you have a window of opportunity available for buying UK stocks on the cheap… and if you’re ready for a long-term investing game, then you’ll very likely reap the rewards in 5-10 years.
Scott Nursten did the situation such justice in our interview when he said that “everything from pizza, housing and retail is trading cheap. This response assumes that Brits will stop eating food, buying homes and wearing clothes. That just isn't feasible. There will be changes to certain markets as a result of this, but […] I think it's an over-reaction. When coupled with the pound devaluation, it presents a great opportunity”.
Remember that in 1987, 2001 and 2008 global markets plunged by over 30%. People were lost in the chaos. Yet, less than 18 months later in each case, they started to recover. After each plunge, the markets had recovered fully within 5 years. But, those stats only reflect indices. Just imagine the valuable returns with effective stock selection and diversification. Brexit is offering a similar situation.
Why Should I Diversify?
If you follow STRIDE’s 3D value investing techniques, you’ll know that diversification is always recommended. But, it’s particularly recommended in volatile times (which Brexit certainly is).
Diversification should be used to mediate risk. It helps to spread your investments over multiple sectors, industries and currencies, essentially limiting your risk. How? By spreading your eggs between many baskets. You only ever diversify from an understanding that we can’t control markets, and that they will always fluctuate. We can’t stop a market’s fall, but we can protect ourselves against it.
In order to diversify well, you’ll need to:
- Understand what your investment goals are (short-term, long-term, or a combination) by completing your investor’s profile.
- Decide at what level of risk you’re willing to invest into (create your investor's profile).
- Analyse which stocks, properties or markets match your investor’s profile.
- Once you’ve selected your investments, divide them between their risk factors (market cap, industry, geography, etc.).
The remarkable thing about a well-diversified portfolio is that where one stock might fall short, another will likely rise to make up the loss. There is always the possibility of risks that are harder to diversify (such as Brexit, the US elections or geological disasters), but if you’re protected against more general risks, these won’t have quite the same negative effect.