Markets rarely like political uncertainty and often prove volatile in the run up to and after elections, especially if the outcome is considered unlikely to benefit the economy.
Political uncertainty

Plan your portfolio for
political uncertainty

Political uncertainty

Ahead of the general election, prepare your portfolio for political uncertainty.

The Prime Minister Theresa May has announced that a snap election will be held on 8 June Markets rarely like political uncertainty and often prove volatile in the run up to and after any major changes, especially if there are doubts over whether the result will benefit the economy. We look at some of the ways investors can plan for any potential storms that may lie ahead.

Despite stating that there would be no election before 2020 when she became Prime Minister in July last year, Theresa May has decided to hold a snap election on 8 June due to divisions in Westminster which she claims will "risk our ability to make a success of Brexit".1

The pound, which had fallen prior to her announcement, immediately rallied on the news, while the FTSE 100 Index tumbled. Many of Britain's largest companies earn much of their revenue from overseas, so the exchange rate can have a considerable impact on their earnings when these are converted back into sterling.

Of course, no-one can accurately predict which way any currency or stock market index will move next, which is why it is important that investors adopt a long-term investment approach.

Confidence in economic stability, alongside a plethora of other factors, such as inflation or deflation worries as well as company results, can all influence how markets move. If there is no clear direction politically, or investor confidence is low because of fears surrounding major changes, such as an election or Brexit, then markets may suffer.

It may be impossible to know what the general election outcome will be or the impact this will have on markets, but investors would do well to ensure their portfolios are prepared for any potential volatility. One thing investors can be sure of, is that we can expect more uncertainty in the weeks to come.

A sensible approach therefore, is for investors to take steps to protect themselves from any potential market volatility. This applies not just to UK-based investments but to all investments, particularly with elections also taking place in France and continuing concerns over how some of US President Donald Trump's policies will be implemented.

Why diversification matters

Ensuring your portfolio is properly diversified by investing in a combination of shares, bonds, property, commodities or cash can help reduce overall risk and volatility caused by political uncertainty.

As your money is invested across several different asset classes, if one of these fares particularly badly, the overall impact on your returns will be lower than if you had invested in this asset class alone. Of course, the opposite effect also applies: If one asset class performs well, the favourable impact on your returns will be lower.

You may also want to consider holding funds invested in different geographical areas, to further spread risk and protect you from stock market falls. Bear in mind however, that this does expose you to foreign currency risk. This means that when sterling is weak, your pounds will buy you fewer foreign currency denominated investments. However, if you already have overseas investments, lower exchange rates can work to your benefit, as this will boost their value to you.

Bear in mind of course, that volatile share prices could offset any gain or loss from currency movements.

Avoid panic decisions

When the stock market rollercoaster ride can seem hard to stomach, remember that often the worst thing you can do is to panic and sell out of your investments. By doing this you will crystallise your losses, whereas if you are able to sit tight during the bad times, you may, in time, be able to benefit from any recovery.

Dipping in and out of the market and trying to pick the best times to invest is an extremely risky strategy, as no-one knows for certain which way markets are likely to move next.

Instead, investing regularly can help smooth out volatility, as your contributions will buy more shares when prices are low and less when they are expensive. Over the long run this should help ensure you benefit from both market ups and downs. Remember, however, that regular investing won't always work in your favour and you could lose out if you each time you invest the market is up and then falls.

Bear in mind that the above content is for information purposes only. If you're unsure, seek independent financial advice. As always, make sure you have as much information as possible before you make any decisions about your money. No matter how you try to protect yourself from uncertainty or otherwise, investments' values can still fall and you might get back less than you invest.

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Remember:

  • The value of your investments can fall as well as rise and you may get back less than you initially invested
  • Investing is not for everyone, if you are unsure please seek independent advice.

Remember:

  • The value of your investments can fall as well as rise and you may get back less than you initially invested.
  • Investing is not for everyone, if you are unsure please seek independent advice.

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