Wednesday, 12 October 2016

Fall in Sterling Prompts Decision to Top-Slice

Since the momentous decision to leave the EU on 23rd June, the value of the UK pound has been under pressure. On the night it stood at $1.50 and has now fallen to $1.22 at the time of posting - a reduction of almost 20%.

On the plus side, the value of my largest holding, Vanguard Lifestrategy has seen a corresponding rise in price as the underlying holdings are priced in US dollars.

Over the past 25 years, the exchange rate has fluctuated between highs of ~$2.00 and troughs around $1.40. The long term average value of sterling is around $1.60, so at some point, I am expecting the pound to recover and move back towards this average level - according to the principle of reversion to mean. The pound may have further to fall, of course but sooner or later, it will bounce back, either as a result in the dollar becoming weaker or the pound regaining support as the Brexit story unfolds.
GBP v USD (courtesy of fxtop.com)

As I am more than happy with the 20% return from my VLS fund over recent months, I have decided to take profits from a part of my holding and have sold 25% of the fund which will now remain in cash awaiting developments.
VLS 60 1 Yr Chart (click to enlarge)

I know this is trying to second guess the markets - equity, bonds and currencies - but it just feels like a prudent step to lock-in some of the unexpected gains and leave the remainder to run.

I hope it turns out OK.

4 comments:

  1. Ciao DIY,
    I have a similar situation myself, the pound devaluation is killing returns on the PF, but I also happen to think that sooner or later the situation will recover and get better. I would have taken profit myself if I was in the same seat. :)
    The reversion of mean article is really great, brings back memories from all those statistics classes :)
    Ciao ciao
    Stal

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    1. Stal,

      It is interesting to get the perspective of an investor in the Euro zone (Italy). From memory you have a mix of USA listed shares also.

      The pound sterling v Euro has fallen to ~1.11 which is also quite a fall from the rate of 1.40 last year. Many UK holiday makers will be rethinking their plans if this low rate continues!

      It will be fascinating to see how it all pans out - sterling, euro, dollar - interesting times as they say.

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  2. Thanks for sharing. Yes, I have been wondering whether to do something similar with my non-GBP holdings. At the moment I have kept sitting on them, but I am sorely tempted to top-slice some gains and then wait and see what happens and where to direct the funds in time. It is a tough decision isn't it!

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    1. DD,

      Good to hear from you - hope the investing is going well.

      As the VLS has provided an unexpected 20% bonus this year, equivalent to 5 yrs 'income', I am fairly happy to convert 25% to cash for a while and see how it all pans out.

      I guess if the pound keeps falling and equity prices keep rising, I may look at selling a further 25%. Equally, if markets fall and the pound recovers I can repurchase my units.

      I sold 8% in July to cover 'income' for this year and 2017 so I now have cash to cover my income requirement up to 2022!

      Good luck with whatever you decide.

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