Unless you have been out of the country for the last few months, you will no doubt have been following the Scottish referendum debate and narrowing polls in Scotland with interest. Wherever your sympathies lie, it would not be unreasonable to have some concern about what this means for your portfolio.
As you are not doubt aware, financial markets hate uncertainty, and that is exactly what we have today (and will certainly have more of if the outcome is a victory for the ‘Yes’ camp).
As a result, we are likely to see some volatility in UK bond, equity and currency markets. But this needs to be placed in perspective. In a global context the ‘Yes’ or ‘No’ vote pales into insignificance relative to Russia’s covert war in Ukraine, or the threat of Islamic State in the Middle East, for example. It is simply evidence of a civilised society executing its democratic process in a peaceful manner; something – in the greater scheme of things – to be proud of, whichever way it goes. The Scottish vote is close to our hearts, but a side story for the rest of the World. The World is and always will be an uncertain place and markets will respond to new any information – good or bad.
In terms of your investment portfolio, it is widely-diversified globally across your equity holdings, mitigating any shorter-term volatility in the UK equity market. In addition, the non-GBP currency exposure that comes with your non-UK equity allocation provides a hedge against any fall in the value of sterling against international currencies that may occur.
On the bond side, you allocation is predominantly in high quality, short-dated global bonds thereby mitigating the risk of any rise in UK yields caused by uncertainty as a consequence of a ‘Yes’ vote. The index linked gilts are there to protect against long-term unanticipated inflation, and we should remember that this still remains a risk whether Scotland remains part of the UK or not.
The temptation is to do something, but usually – and we believe it to be so in this instance – the best thing to do is to believe in the long-term, globally diversified structure of your portfolio, and ride out any possible uncertainty. ‘This too shall pass’ – as the legendary US investor Jack Bogle* would say.
There will be bigger global storms than this in the future, although at the moment these are the grey clouds that we can see approaching from the horizon.
In terms of the detail about what happens to the currency, pensions, ISAs etc, on both sides of the border, let us just wait and see. We will keep vigilant on your behalf and keep you posted, but for the meantime keep calm and stick with the programme.
Please do call us if you have any specific concerns.
*Founder of Vanguard Asset Management