For all the old jokes about change being the only constant, change also has a habit of making people nervous. Stock markets are ultimately made up of people – traders on one side and the employees of the companies they trade with on the other. Because of this the prospect of significant change can be reflected in the performance of the stock exchange. This effect can often be noticed around election times in general.
Sterling and the Importance of Image
Outside of the Euro zone, most individual countries have their own currency (at least officially). Therefore in order for international trade to take place, there has to be an agreed rate at which one currency is exchanged against another. While individuals may not think of themselves as being involved in the global market, the truth is that it impacts the daily life of pretty much everyone. Many of the products on supermarket shelves are imported and the UK exports both goods and services. Therefore the strength of any currency as compared to other matters to most people’s money management more than you might initially think. In many ways the relative strength of currencies can be seen as an opinion on the prospects of the countries in question. Therefore, when a country’s future is uncertain, such as in a period before an election, that country’s currency may become weaker in comparison to countries with more stability.
Will the Pound Sterling Start to Spin?
It is a reasonable expectation that markets will react when a new government is formed. If the market’s reaction is negative then it is entirely possible that there will be a fall both in the value of the stock market and the value of sterling itself. This may well be only temporary, but this may be of small comfort to investors who prefer stability. Those old enough to remember the 1990s may still recall “Black Wednesday” (16th September 1992) when sterling collapsed and the UK was forced to withdraw from the European Exchange Rate Mechanism. Investors might want to look at their options for protecting their portfolio against a severe drop in the value of sterling. This could be a particularly important step for those with a more international lifestyle, for example those planning on retiring abroad or sending (grand) children to study abroad.
What Does This Mean in Practical Terms?
There are many different approaches to investing, no matter what your attitude to risk you can probably find one which fits in with your financial plan. Some people like to invest directly into stocks and shares, others prefer investing in funds. Whether you are investing for growth or income, whether you specialise in a particular sector or prefer tracker funds or managed funds, you will have to understand that markets and currencies have their ups and downs. At the same time, investing can also be a classic example of the phrase “don’t put all your eggs in one basket”. Opening up your investing horizons to opportunities overseas and in other currencies can be a very helpful way of reducing your exposure to (temporary) issues with the UK market.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED
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