As the UK and European Union enter the final phase of negotiations to secure a deal on the UK’s exit, there are certain risks and rewards from various possible scenarios I have been evaluating when managing my clients’ pensions.
This blog has been written to offer you some peace of mind that it’s not all doom and gloom and that, in fact, whilst increased market volatility can cause disappointments, Brexit may also create opportunities.
Before we get stuck into more technical information, here’s a little bit of market knowledge to help you understand how a pension portfolio is constructed.
I’m guessing you have heard the phase ‘you don’t want all your eggs in one basket’. Well that’s the same with your pension and goes hand in hand with what level of risk you want and need to take. Spreading risk is one of the most important principles of investing, not only between several investment types (also known as different asset classes) but also between different companies.
Heres some examples of different asset classes, in order of high to lower risk:
- Equities (Shares)
- Commercial Property
- Fixed Interested (Bonds)
Essentially, you don’t want to be 100% investing in the UK market, for obvious reasons – such as it would be up and down like a yo yo right now and you also don’t want to be sat in absolute cash, as you would be making zero return – if anything you would be eroding your wealth.
Taken together these different asset classes could be blended to produce an asset allocation, which is referred to as a diversifying your investments or not having all your eggs in one basket. By taking this approach, even if a particular asset class or company goes through a bad patch, the rest of your investment need not be affected.
Below is a illustration of an asset allocation for a Balanced Investor, as well as a table outline possible results of no deal (or bad deal) or an agreed deal.
No matter what the outcome, the UK is not going to disappear and will remain one of the world’s largest business centres. So whilst Brexit may be dominating the headlines in the UK, it does not distract from my focus on the bigger economic picture and the wide array of asset classes that I can invest in in for my clients, and not just the UK market .
Which means it is a question not if we invest but of when, how and with what level of diversification.
So how will Brexit affect your pension?
It all depends on the assets, geographical split you have and the level of risk you’re taking.