Since Brexit, the Pound has been on something of a roller coaster ride as politicians, bureaucrats and economists try to figure out exactly what’s going on and what it will mean for the UK. Confusion since the referendum has led to a cheaper Pound compared to most currencies, including the US Dollar where it’s more than 10% weaker at the time of writing. But what does this actually mean in terms of where your money is invested?
It’s a good thing for money you have invested in companies overseas
A falling Pound teaches us a valuable lesson - avoid putting all your eggs in the same basket. Too often, investors are tempted to buy what’s familiar to them – like their domestic market (e.g. UK investor buying UK shares and bonds) – this is commonly known as home bias. It might seem like the ‘safe bet’ but in reality, relying on one market means you’re relying on that market to perform well. The issue with that is, something like Brexit comes along and the UK market struggles, materially affecting your investment returns. Alternatively, if you spread your money across the UK, US and Japan, the performance of the latter two markets could help prop up the relatively poor performance of the UK market, giving you the chance of making positive returns.
So why is diversifying good for your investment plan? US shares are bought in US Dollars, Japanese bonds in Japanese Yen, European Property in Euros, and so on. So, if the value of the Pound drops, your investment plan grows in value because your investments are now worth more in Pounds than they were before!
Remember, when the Pound weakens, it is likely that investments in your plans held in a foreign currency are worth more money.
Will the Pound rise again?
Without a clearer plan for Brexit we are unlikely to see the Pound strengthen significantly anytime soon. Besides, if it does, our investment team can take measures to avoid undesirable currency movements altogether. For now, just remember whenever the Pound goes down it means all your worldwide investments could be going up in value, and therefore the overall value of your plan could also be going up in value, so there can be some upsides to the protracted Brexit process
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Investing is for everyone.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.