funduffer wrote:Is there any logic in this, or are there other approaches that people are considering?
I'd recommend a look at a 5-year FTSE 100 chart, especially with regard to the time of the Brexit referendum (just about halfway through 2016) and the lead up to it and the aftermath of it. There were all sorts of dire predictions beforehand as to what would happen if the referendum result was "leave", but what did actually happen when it turned out (rather to most commentators' surprise) that it actually was "leave" ? The low point for the entire five years was several months earlier, around January/February 2016, and the immediate reaction in late June 2016 was a very roughly 5% fall, similar in size to
many other falls over the 5 years: I really don't think anyone looking at the chart would pick it out as in any way special if they didn't know to look for it. And it was recovered from pretty quickly (within about a week IIRC) and the FTSE hasn't dropped back to pre-referendum levels since!
Similar charts of the FTSE 350 and FTSE 350 High Yield indices show similar pictures. One of the FTSE 250 index shows a significantly bigger immediate post-referendum fall (over 10%) that does stand out a bit, but not very prominently, and that too was recovered from quite quickly (a month or slightly over) and again the index hasn't since fallen to pre-referendum levels.
It's also instructive to look at what those charts do around the time of Trump's win of the US presidential election in late 2016, which is another case of an outcome that was widely predicted by commentators to have dire results if it were to happen and which was a bit of a surprise when it did happen. Again, while it is visible in the charts if you know where to look, it really doesn't stand out and the indices have continued to make progress (and the shares themselves would be paying dividends on top of that capital progress) since.
Personally, I'm betting on the outcome of the Brexit negotiations having a similar 'damp squib' effect on the stockmarket. If I were a currency speculator, I wouldn't be anything like as sanguine: exchange rate charts
do show a very pronounced major event around the time of the referendum result. But as far as the stockmarket is concerned, my view is that it simply isn't worth worrying about - especially if you're only going to bet on it with the next 9 months of dividends: they're probably around 4% of the portfolio value, so exploiting a 5% drop in the market is only worth about 0.2% on your portfolio value. And if you get the bet wrong and the market instead rises by 5%, then it's worth about -0.2% of your portfolio value... Basically, if you're going to regard rises and falls in your portfolio value of that magnitude as worth worrying about at all, you're probably not suited to HYP investing at all, as your portfolio probably rises or falls in value by more than that amount most trading days... (Though in that case, whether you're not suited to stockmarket investing at all or suited to a much shorter-term trading strategy, I don't know.)
There is a lesson to be drawn from the rather bigger effect of the referendum result on the FTSE 250, I think. The FTSE 250 does have a greater concentration of companies whose operations and markets are based in the UK (and less of companies whose operations and markets are based internationally) than the FTSE 100. Such companies will mainly have been affected by the exchange rate changes through the effect on the prices of their supplies - directly in the case of imported supplies, indirectly in the case of supplies whose prices rise due to things used in making them. Those effects are negative, so the companies concerned will tend to have been adversely affected by the exchange rate changes, though how much by will depend of how much their supplies are (directly or indirectly) imported. Companies with significant overseas operations and markets and not using much in the way of imported supplies will tend to have been positively affected, and between those two types, there is likely to be a range of less extremely positively and negatively affected companies. Anyway, the greater concentration of the FTSE 250 on 'UK-based' companies compared with 'internationally-based' ones does seem to have produced less of a good balance of positively and negatively affected companies than the FTSE 100 and so a sharper immediate fall - though I should emphasise that that was a pretty short term effect: the FTSE 250 has been doing better than the FTSE 100 since, both on a capital-only basis and on a total-return basis.
I'm
not saying that the lesson is "pile into the FTSE 100 and avoid the FTSE 250 like the plague": it isn't, for two reasons. Firstly, there are plenty of exceptions (in both directions) to the general tendency for FTSE 250 companies to be more 'UK-based' and FTSE 100 companies to be more 'internationally-based'. Secondly, over-concentration on 'internationally-based' companies is just as capable of producing poor results in the event of a good Brexit negotiations outcome as over-concentration on 'UK-based' companies is in the event of a poor Brexit negotiations outcome. So the lesson I would draw is basically a diversification one: aim for a good balance of 'UK-based' and 'internationally-based' companies, with the intention being to get a substantial 'swings and roundabouts' balance of good and poor individual company results no matter what the Brexit negotiations outcome. (This does assume the normal HYP mindset of avoiding bad outcomes for the portfolio as a whole even if it means also avoiding unusually excellent outcomes as well. If you have another mindset, such as wanting to make a prediction about the Brexit negotiations outcome and put money at stake on it, so that you will get an excellent portfolio outcome if your prediction is right, willingly taking the risk of a decidedly poor portfolio outcome if your prediction is wrong, you need different advice - and a different advisor: I have no real idea what the outcome of the Brexit negotiations will be and so simply cannot help anyone with such an aim! Apart from the above observation about the size of the bet, that is: if one is at all serious about that aim, one really needs to put more than 9 months of dividends at stake on it.)
One other thing to emphasise is the reason why I'm saying 'UK-based' and 'internationally-based' in quotes: they are about where the company has its operations and markets,
not where it is headquartered or listed on stockmarkets.
So my approach is basically business just about as usual with regard to reinvesting dividends, though possibly with even more attention than normal paid to diversification, and especially to the balance between 'UK-based' and 'internationally-based' companies.
And finally, I would make the point that although the Brexit negotiations outcome will be an important event, it's by no means that only important event that will happen in the future. There is a sort of 'future' counterpart to "recent events syndrome", which might be called "next anticipated big event syndrome": people tend to exaggerate the importance of that event relative to other future events (and they're very ably assisted by the media in that exaggeration IMHO!). There will be plenty of big events after Brexit, and I think the odds are high that something else will quickly become the thing that people are worrying about and wondering whether they should delay investing because of it. Certainly I don't remember any significant period that in the ~17.5 years since pyad's original HYP articles that people haven't been expressing such worries on the TMF or TLF boards!
Gengulphus