28 Jun Brexit
Are you sick of hearing about it yet? Other than a volatile market, does it concern us? These are the questions being asked by investors this week as the unexpected result of a vote for the UK to extricate itself from the European economic union sinks in. The UK government promised to hold this referendum, with the hopes that it would re-affirm their leadership, and their country’s commitment to the Euro zone. Instead, in a surprise outcome voters made it clear that they wanted out.
So what does this mean for the market? The simple answer is volatility and caution, and that means pricing in uncertainty. This event far out shadows any other referendum that I’ve seen in my 25 years as a Financial Advisor, but is it really much different? Great Britain is known for it’s strong currency, robust democratic political system, and access to the world markets. The fact that it’s not going to access them any more under a European Union system, doesn’t mean for one second that goods and services will suddenly cease to flow. Britain imports way more from the rest of Europe than it exports. It doesn’t mean that some mass migration of Europeans will have to occur, and it doesn’t mean that markets will collapse. Of course there will be changes, adjustments, wins and losses, but these happen all the time for other reasons. Still, the media will focus on the effects of this singular event for some time, and the media will be quick to blame it or reward it for every market movement for months and possibly years to come.
How can we protect and profit from this?
Buying into a down market is always a good start. It’s the hardest thing to do (uncertainty) but potentially the most profitable. There are a few ways to do this. First, if you have a monthly contribution to your savings plan then you are already averaging in. Consider increasing the frequency of your investments to capture events like this one. The second is to make lump sum additions. This strategy has more risk because you are banking on buying at the bottom, which may not occur immediately (but it often does). It also has the most reward if you succeed. Buying into a depressed market is the closest thing to a timing strategy you will ever hear from me.
What not to do:
As always, it’s not a good idea to buy into media frenzy and trigger an unwarranted loss by selling. There is far too much wrong information and uncertainty to make informed decisions about selling and locking in a loss. It was already too late the moment the vote was cast. So this is where our portfolio managers earn their keep. They are far better equipped with research, cash positions, market access, and people on the ground in many countries assessing the options and opportunities. I’ve already received dozens of manager updates affirming that this is exactly what they are doing at this very moment.
It’s always a good time to buy, but now is one of those times that are potentially better. If you are not able to at this time, then it’s a good time to observe. It’s my belief that the level of volatility we are seeing comes not so much from the immediate financial effects of Britain’s exit, but from the potential of other EU countries who may now follow suit.