“The latest vote just means the situation remains uncertain,” said Greg Davis, Vanguard’s chief investment officer. “Uncertainty has been a part of the Brexit process from the beginning, and such significant events underscore the value of a commitment to long-term, diversified investing.”
A weakening in prices for U.K. and European assets in response to Brexit developments would almost certainly be felt within globally diversified portfolios.
If your portfolio is fully diversified across asset classes and geographies, you could expect substantial direct exposure to these markets1 and even greater indirect exposure, considering the interconnectedness of global commerce. The U.K. is a global financial center and the world’s fifth-largest economy. The E.U. comprises 28 states, including 4 of the world’s 7 largest developed economies.
Should you reconsider global exposure?
“The goal of diversification is to spread risk within the portfolio,” Davis said. “This limits the negative impacts of volatile markets while capitalizing on strong performance elsewhere.”
“We knew that Brexit could spur volatility and be challenging for investors,” he said. “What no one could know was the course that exit negotiations would take. There’s always the potential for both positive and negative market developments.”
Markets reflect such developments—the push and pull between known risks and uncertainty—through the prices they set for securities every business day. That makes it challenging for investors to try to profit by getting ahead of a trade.
Vanguard’s investment professionals work together, as they have since the June 2016 U.K. referendum that set Brexit in motion, to ensure that our funds are positioned for any eventuality. Our Investment Strategy Group continues to assess the likelihood of different Brexit scenarios and works with our global portfolio management teams and Risk Management Group to consider the potential impact on investment outcomes.
“It’s hard to get out of the way when an event as disruptive as Brexit comes along,” Davis said. “Instead, what investors can do is understand why they’re investing in the first place, stay invested through the inevitable ups and downs, spread their risk around by maintaining a diversified portfolio, and accept that none of us has a crystal ball.”
1More than 16% of the FTSE Global All Cap Index and more than 36% of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index consisted of securities from the U.K. and other E.U. member nations as of January 31, 2019.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is no guarantee of future returns. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks, including currency fluctuations and political uncertainty. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.