However the vote goes, the passive portfolio is the winner


As the result of the Scottish referendum on independence from the UK looks like an ever closer call, there has been plenty of noise in the media about what this will mean both for international finance and for the British investor.

Scare stories about another financial crash following a ‘Yes’ vote (not just from international banks but also, it must be noted, from politicians with a vested interest in a ‘No’ outcome) have been supplemented by comments from professional investors who are switching some of their clients’ UK holdings across the Atlantic and into the dollar, just to be on the safe side.

Wherever their sympathies lie, it would not be unreasonable for investors – even those who are fully signed up to the passive approach – to have some concerns about what this means for their portfolio. 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 in the UK, but a side story for everyone else.  The world is and always will be an uncertain place and markets will respond to any new information – good or bad.

A passive investment portfolio, which is well-diversified globally across equity holdings, will mitigate any shorter-term volatility in the UK equity market.  It will also include non-GBP currency exposure as part of its non-UK equity allocation, providing a hedge against any fall in the value of sterling against international currencies that may occur.

On the bond side, the portfolio allocation will be in high quality, short-dated global bonds, thereby offsetting the risk of any rise in UK yields caused by uncertainty as a consequence of a ‘Yes’ vote. (Index linked gilts are there to protect against long-term unanticipated inflation, so remember that this still remains a risk whether Scotland remains part of the UK or not.)

The understandable temptation is to do something, but usually – and it’s no different this time – the best thing to do is to believe in a long-term, globally diversified structure, and ride out the 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, just as there have been in the past (thirteen years ago almost to the day, in fact). Despite what it means for Scotland, or the UK financial markets, the result of the referendum should barely cause a ripple in the well-diversified and balanced investment portfolio.