It’s Time To Close Your Eyes & Ears

Tomorrow is a big day for UK politics. Will the result be overwhelmingly Labour-red (as predicted) or will the re-birth of Tory-blue surprise all of us? Political views aside, when it comes to your finances and your long-term financial plan the clue is in the name: Long. Term.

To be blunt, the financial markets don’t really care who’s in power, or should that be really Keir about who’s in power (sorry). Your financial plan should be largely immune to short-term governments. You’re in it for the long run, for Rishi or poorer (really sorry).

To get serious, I’ve been asked this question a number of times over the past couple of months:

‘What changes should we be making to our plans now, in case Labour get into power?

My answer is a simple one. Absolutely none. To make changes to your financial plan based on speculation and what might happen is ludicrous. Act on known information, not unknown hype and conjecture. 

It’s been all around us in the financial media these past few months… talk of British ISAs and Labour’s seemingly ‘in-out-shake-it-all-about’ stance on the pension Lifetime Allowance are two that come to mind.

It’s natural therefore for investors to be feeling anxious and concerned about any upcoming changes and what it might mean for them and their finances.

But the truth of the matter is that governments will come and go. In their finite window within which to make tax and personal finance changes they’ll make only a handful. Often their tampering is limited due to potential revolt from the public (the tories and the ‘triple lock’ state pension guarantee comes to mind).

At the moment party representatives on both sides will be promising the earth, but inevitably – as is always the case in personal finances – what’s actually delivered will be lack-lustre and distinctly vanilla.

There has been chat about aligning Capital Gains Tax rates with Income Tax and increasing the Inheritance Tax Nil Rate Band for many a year, and while tinkering has occurred around the edges, the broad facts haven’t materially changed.

I always explain to clients that government’s change the short-term rules of the game (tweaking of tax rates, tightening and loosening of monetary policy) but the success of your financial plan is framed around long-term goalposts.

Should you be making portfolio changes in light of these transitions?

In short, almost certainly not. The current election noise is just the latest episode in a litany of events tempting you to do something when the correct answer for most people is to do nothing.

When it comes to your portfolio you need to remember that the UK market is one tiny element of your overall portfolio, or it certainly should be if you are diversifying appropriately and not holding all your proverbial eggs in the UK stock market basket!

The trials and tribulations of domestic politics on our island nation will in fact have close to no-impact on your overall portfolio’s financial returns. Investing is not an overnight success, and smart investing involves removing your domestic biases and looking to the global financial markets as the true means of you beating the terminator of wealth that is inflation.

What you should know

What lies ahead for the governing class of these nations, and how will this affect global financial markets? In short, no one knows. While we have clarity about what moves markets in the long term, its short-term vagaries are determined by the madness of crowds.

Any attempt to profit off potential short-term reactions to these political events is merely market timing in disguise. Those attempting this risky endeavour are not investing but speculating on an unknown outcome. Real investors focus on the long term, clear about what they can control and what they can’t.

While we know very little about the short term, we know much more about the long term. We know that businesses, and those who manage them, adjust remarkably well to the changing landscapes in which they operate. In remaining focused on the demands of consumers, they find ways of innovating regardless of whom the sitting government happens to be. If, as a group, these businesses continue to grow their earnings and dividends, we, as disciplined and patient investors, will benefit.

The dominant force which propels our world forward is technology. Technological advancements have had a much more meaningful impact on shaping this world than the battle flag of the party in power. These technological advancements manifest as companies that we are all invested in.

I’ll leave you with a graphic I absolutely love – prepared by Timeline – which shows the long term growth of £1 invested in UK equities over the last 100 years, charted against the prevailing government in power during that period – blue signifying Conservatives and the reddish/pink signifying Labour.

What do you notice?

The rise in share prices of good quality companies is immune to politics. It doesn’t matter who was (or is) in power, the long-term trajectory is up.

So regardless of what tomorrow’s result brings, stick to the long-term and keep your eyes firmly rested on the prize.

While politics is important, and many people admirably get involved in improving the lives of those around them, it’s also a very emotional subject.

One thing we know about investing and money generally is that it doesn’t mix well with emotions. Frankly, it’s a recipe for disaster. For this reason, a good rule of thumb is never to mix your politics with your money.

If your goals haven’t changed, and you’re already invested in the appropriate portfolio, it’s likely safe to do nothing.

Focus on the things you can control; your saving rate, spending rate, and asset allocation.

Thanks for reading as always.

Benjamin

Disclaimer – the above is intended as guidance and should not be relied upon as financial advice. Please seek regulated financial advice.

Benjamin Mitchell

Benjamin Mitchell

I’m a chartered financial planner that can help you plan for tomorrow and also live for today.

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