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BLOG: Are you at risk of confirmation bias as Brexit begins?

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12/07/2017
UK investors will need to resist making snap decisions based on a couple of Brexit stories. But what are the UK's trade prospects post-Brexit and what type of funds could you hold?

Last week, leaders from around the world gathered at the G20 summit. For Theresa May, it was her first real chance to chat globally about Britain’s trade prospects once it has come out of the European Union. Plenty of goodwill seems to be circulating, but it’s important to remember Brexit will be more complex than a few punchy headlines convey.

Trump was typically effusive, quoted as saying he expects a “very, very big deal” to be done “very, very quickly”. May also reportedly had positive meetings with India’s prime minister Narendra Modi, Japan’s Shinzo Abe and China’s Xi Jinping. Actual agreements, however, are only likely to begin being hammered out once the UK has separated from the EU.

Figures published by the World Economic Forum state the average time taken by the US to negotiate and implement a bilateral trade agreement is just over three and a half years. I suppose this is quick when you compare it to the eight years it took the US to reach a deal with Columbia, or the six years taken with Korea. Still, I think you’ll find most British businesses feel four years of trade uncertainty, on top of two years of Brexit negotiations, is quite enough. And we may need to re-negotiate deals with more than 100 countries, according to some estimates.

In this climate, the behavioural investing theory of confirmation bias, where we filter information selectively to back-up our own opinions, may become a particular risk to watch out for. As media outlets seize on Brexit snippets and seek to present them in clickworthy fashion, investors will have to be vigilant. A quick skim of your news feed in the morning won’t tell you everything you need to know.

With the UK stock market sitting around all-time highs, mistakes could cost you dearly. Resist making snap decisions based on a couple of quick stories – especially if they happen to back up your own biases. One sensible route could be to put your money into a couple of different types of funds that give you a more resilient portfolio, which you will hopefully be less tempted to ‘tweak’.

A handful of UK holdings forms a nice cornerstone: Standard Life Investments UK Ethical, with its focus on sustainable firms, taps into a strong global trend; Investec UK Alpha offers core exposure; and Liontrust UK Smaller Companies, while perhaps more linked to the UK domestic economy, invests with an emphasis on quality that has seen it deliver excellent returns over the years.

A weighting to Europe may also prove to be worthwhile (hedging your bets, if you like). You could look at Henderson European Selected Opportunities for a fund with a preference for mega and large companies, or BlackRock European Dynamic, if you want a more even spread across medium-sized firms too. Meanwhile multi-asset funds that invest around the world can help lend some stability. I like F&C MM Navigator Distribution and Schroder MM Diversity Tactical.

Or, you can try to exploit the behavioural traits of other investors with the M&G Episode Income fund, whose manager deliberately looks for pockets of investor ‘irrationality’ and aims to make a profit by keeping a clear head when others are losing theirs.

Darius McDermott is managing director of Chelsea Financial Services

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