Individual investors may face many ‘known unknowns’ – or, things that they know they don’t know. The UK’s referendum on EU membership is one of them, confronting people with a large degree of uncertainty.
However, it’s not necessary to ‘make the right call’ on the referendum, or its consequences, to be a successful investor. Our approach is to trust the market to price securities fairly, taking into account broad expectations of future returns.
In arguing for the status quo, the ‘remain’ campaign is able to point out familiar characteristics of membership.
The ‘out’ campaign, however, is based on intangibles that can only be resolved after the result of the referendum is known. It’s impossible for any individual to predict the implications of these unknowns with certainty.
But, this is no cause for concern. While the referendum is imminent and its implications are potentially vast and unpredictable, it’s not necessary for individual investors to make any judgement calls on the outcome. We have faced many uncertainties in the past – general elections, market crises, recessions, wars. Throughout all of them, the market has done its job of aggregating participants’ views about expected returns and priced assets accordingly.
And, while these events have caused uncertainty, volatility and short-term losses and gains, none of them have altered the expectation that stocks provide a good long-term return in real terms.
We have a global view of investing and we know that the market is very good at processing information that’s relevant to future returns. Because of this view, we don’t attempt to second-guess the market. We manage well-diversified portfolios that don’t rely on the outcome of individual events or decisions to target the expected long-term return.
The following chart illustrates this very point as it shows the long term performance of world markets from 1970 to 2015 through wars, crises and slumps. So, forget all the short term political manoeuvring and trust the markets in the long term.