Here’s How Investors Can Thrive Amid Post-Brexit Uncertainty
The world has indeed changed as a result of Brexit and investors need to be prepared should a similar game-changing event occur again, said Charles Reinhard, head of portfolio strategy at MainStay Investments.
"Investors need to build portfolios that can withstand multiple shocks like Brexit through diversification and by finding ways to participate and protect at the same time," said Reinhard.
Reinhard said a diversified portfolio grounded in dividend-paying stocks is imperative because they tend to be "less volatile and outperform over time."
He added that valuations in international equities are especially attractive on the weakness in the current marketplace. Nevertheless, the currencies associated with buying foreign stocks can be hard to predict. For example, in the 30, 60, and 90 days leading up to the Brexit vote, the British pound appreciated and depreciated approximately 50% of the trading days against the Euro and U.S. dollar. The same can be said for the Euro against the U.S. dollar.
"We believe a 50% currency hedge on international equity exposures represents a thoughtful way to manage these ups and downs," said Reinhard.
The post-Brexit uncertainty has also created a rush into the safety of U.S. Treasury bonds. The benchmark 10-year Treasury now yields less than 1.4%, exacerbating the problems for already yield-starved investors.
"Investors seeking income might consider veering from an index that is highly exposed to Treasury yields and building more flexibility into bond positions to be in harmony with persistent trends in credit, slope of the yield curve and level of rates," said Reinhard. "This could be done in the form of an ETF or an active strategy."
Another way to cope with exogenous shocks to the global financial system is to hold commodities like gold, which is up almost 30% thus far in 2016.
"A broader allocation to commodities could be one component along with other liquid alternatives to build a portfolio that can withstand shocks like Brexit," said Reinhard.