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How to handle likely Brexit volatility

19 March 2019 | Markets and economy

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Commentary by Greg Davis, chief investment officer at Vanguard in the United States.

Investors have long grappled with the concepts of risk and uncertainty. These concepts feed each other, and lately, with regard to Brexit, they've been ravenous.

After the U.K. Parliament voted on Thursday, March 14, to ask the European Union to allow Brexit to be delayed past March 29, a number of outcomes remain possible. Each is very different from the others except in its potential to concern investors.

"The latest vote just means the situation remains uncertain," said Greg Davis, Vanguard's chief investment officer. "Uncertainty has been a part of the Brexit process from the beginning, and such significant events underscore the value of a commitment to long-term, diversified investing."

A weakening in prices for U.K. and European assets in response to Brexit developments would almost certainly be felt within globally diversified portfolios.

An investor whose portfolio is fully diversified across asset classes and geographies could expect substantial direct exposure to these markets1 and even greater indirect exposure, considering the interconnectedness of global commerce. The U.K. is a global financial center and the world's fifth-largest economy. The E.U. comprises 28 states, including four of the world's seven largest developed economies.

Should investors reconsider global exposure?

"The goal of diversification is to spread risk within the portfolio," Mr. Davis said. "This limits the negative impacts of volatile markets while capitalizing on strong performance elsewhere."

"We knew that Brexit could spur volatility and be challenging for investors," he said. "What no one could know was the course that exit negotiations would take. There's always the potential for both positive and negative market developments."

Markets reflect such developments—the push and pull between known risks and uncertainty—through the prices they set for securities every business day. That makes it challenging for investors to try to profit by getting ahead of a trade.

Vanguard's investment professionals work together, as they have since the June 2016 U.K. referendum that set Brexit in motion, to ensure that our funds are positioned for any eventuality. Our Investment Strategy Group continues to assess the likelihood of different Brexit scenarios and works with our global portfolio management teams and Risk Management Group to consider the potential impact on investment outcomes.

"It's hard to get out of the way when an event as disruptive as Brexit comes along," Mr. Davis said. "Instead, what investors can do is understand why they're investing in the first place, stay invested through the inevitable ups and downs, spread their risk around by maintaining a diversified portfolio, and accept that none of us has a crystal ball."

1 More than 16% of the FTSE Global All Cap Index and more than 36% of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index consisted of securities from the U.K. and other E.U. member nations as of January 31, 2019.

Important information:

The views expressed in this material are based on the author's assessment as of the first publication date (March 2019), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The authors may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise. Any "forward-looking" information contained in this material should be construed as general investment or market information and no representation is being made that any investor will, or is likely to achieve, returns similar to those mentioned in this material or anticipated in this material.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation.

Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation.

While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use.

Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice.

This material does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

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