What the rising pound means for your investments.
The rising pound is a good thing, right? A stronger pound means our money goes further when purchasing stuff from abroad (think: fuel, food and vacations). This means we become more wealthy relative to people in other countries.
But if you’re invested in financial markets – particularly stocks – then the rising pound may decrease the value of your investments. If you own, say, a fund that invests in global stocks and the pound increases by 10% then, all else being equal, that fund's value will decrease by about 10% (in £ terms). For the same reason that your ski trip gets less expensive, your investments outside of the UK go down in value.
But if you’re invested in financial markets – particularly stocks – then the rising pound may decrease the value of your investments. If you own, say, a fund that invests in global stocks and the pound increases by 10% then, all else being equal, that fund's value will decrease by about 10% (in £ terms). For the same reason that your ski trip gets less expensive, your investments outside of the UK go down in value.
Is this a problem? Well, possibly.
For one, since the Brexit vote in 2016 the value of the pound has pretty much just gone down relative to other currencies – which has pushed up the value of investments outside the UK. This has made investing outside the UK look like an excellent idea for UK-based investors and, as a result, huge numbers of investors are now simply invested in global stocks – often via funds that simply track ‘the market’. This is true of both many do-it-yourself investors as well as those that work with financial advisers.
However, since the pound’s recent lows in August, it has risen 10% versus the US dollar. This has depressed the gains made by non-UK investments while UK stocks have performed significantly better: global stocks are up 1-2% since then while the FTSE 250, a basket of primarily UK-focused stocks, is up about 13%. That's a big difference!
My view is that this trend will continue in 2020 and perhaps beyond. However, my ‘view’ isn’t particularly relevant to the point I am trying to make...
However, since the pound’s recent lows in August, it has risen 10% versus the US dollar. This has depressed the gains made by non-UK investments while UK stocks have performed significantly better: global stocks are up 1-2% since then while the FTSE 250, a basket of primarily UK-focused stocks, is up about 13%. That's a big difference!
My view is that this trend will continue in 2020 and perhaps beyond. However, my ‘view’ isn’t particularly relevant to the point I am trying to make...
It's all about you.
What is far more relevant than any investment 'view' is how you intend to eventually spend the money that you have invested. Will you be buying a home in the UK? Will you be paying school fees? If you’re a bit older, might you be funding your care in later life? All of these future costs are in pounds. Therefore, owning investments that decline when the pound goes up fundamentally works against your interests.
I am not advocating that a UK-based person should own only UK stocks – doing so would mean missing out on investing in great companies outside of the UK. But now is probably a very good time to re-evaluate your portfolio’s exposure to a rising pound – and how that gels with your expected future spending. Investing less in global stocks and more in stocks and other investments that will benefit from a rising pound might prove much more suitable for you.
I am not advocating that a UK-based person should own only UK stocks – doing so would mean missing out on investing in great companies outside of the UK. But now is probably a very good time to re-evaluate your portfolio’s exposure to a rising pound – and how that gels with your expected future spending. Investing less in global stocks and more in stocks and other investments that will benefit from a rising pound might prove much more suitable for you.
If you would like to discuss this further.
TindleWealth offers all-encompassing financial advice and bespoke investment management that takes into account your unique circumstances and priorities.
Every initial consultation is free and most people learn something from this initial chat even if they don't move forward - so please do get in touch if you think discussing this might be helpful. Use the form below to contact us or reach out to Scott directly at scott@tindlewealth.com
If you choose to become a client, you should expect to pay a minimum of £200 per month. Households with annual income or investments in excess of £200,000 are most likely to get excellent value from our service. Full details on our fees can be found in our Terms of Business here.
TindleWealth offers all-encompassing financial advice and bespoke investment management that takes into account your unique circumstances and priorities.
Every initial consultation is free and most people learn something from this initial chat even if they don't move forward - so please do get in touch if you think discussing this might be helpful. Use the form below to contact us or reach out to Scott directly at scott@tindlewealth.com
If you choose to become a client, you should expect to pay a minimum of £200 per month. Households with annual income or investments in excess of £200,000 are most likely to get excellent value from our service. Full details on our fees can be found in our Terms of Business here.