How to prepare for the most nerve-racking election ever

I was reading a mildly scary piece in the FT's fund supplement this morning.

It's about how fund managers are fretting about the forthcoming general election in Britain. They each have tales of woe about how dangerous various combinations of parliamentarians could be.

The good news is, markets are so far showing no signs of real distress about it.

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The bad news is, that might be because almost every potential outcome seems equally disastrous.

Could we see a sterling crash?

He even suggests that the pound could slide to $1.25. That's pretty radical, given that you have to go back to the miners' strike in the mid-1980s to see sterling taking anywhere near that kind of hit.

Of course, Neptune no longer owns any UK equities, so there's an element of book-talking here. But it's punchy stuff all the same.

So how could we end up in such a sticky position? That's where it gets tricky. Because you can paint a miserable scenario pretty much regardless of who gets into power.

If Labour wins, you've got the whole anti-business' issue. You end up with policies that sound like they'll be popular at the ballot box, but turn out to be deeply stupid in practice (like freezing energy prices right before a massive slump in the oil price, for example).

Then throw the SNP into the mix. Suddenly you have a left-wing minority government being propped up by a far more left-wing nationalist group, which is in the odd position of influencing policy-making for a country that it wants to break up.

Those both sound like recipes for investor panic or at least concern. Certainly, for my money, the Labour-SNP combination is the most worrying potential outcome.

After Grexit, could we see Brexit?

If the Tories win (or win with Ukip support), you'll end up with an in/out' referendum on the European Union. The idea of Britain deciding to walk out of Europe and being locked out of European markets by an unforgiving group of ex-partners as a result is the biggest fear for other pundits.

Again, there's an element of book-talking here. Wealth managers don't want the paperwork that would be likely to go with a split between Britain and Europe. You don't really want to be forced to choose between London the most important financial centre and the rest of Europe.

But there's no doubt that leaving the EU could be disruptive. It doesn't mean that it would be a disaster by any means I don't think it would. But I can see that certain industries and companies would probably delay some investment decisions until they'd figured out the state of the brave new world.

In short, regardless of who wins, we're going to see potential upheaval and nasty surprises. And more to the point, the market will eventually wake up to this fact during the run-up to the election.

Protecting your portfolio from election fallout

When people start fretting about political uncertainty in Britain, the pound and gilts tend to feel it first so you can keep an eye on those (they wobbled a little around the Scottish independence vote, but this is likely to have a bigger impact).

However, you can try to make sure that your portfolio is positioned to ride out whatever storms the election brings. And odds are, it will bring at least some squalls.

That's why it's important to diversify your portfolio. There's nothing wrong with having some of your money invested in the UK particularly in UK blue-chips, which are relatively cheap and nicely exposed to the rising US dollar in many cases. It makes sense, particularly if you plan to retire in the UK you want your assets and liabilities to match up.

But you don't want to put all your eggs in one basket. That's another reason why we regularly recommend investing some of your money in good value overseas markets, like Europe or Japan (or both). If you're not already a subscriber to MoneyWeek magazine, you can read more about the sorts of markets we like and some of the assets we don't currently like in this report we've just put out. You'll get your first four issues free too.