When we left the office last Thursday, the Dow stood at 18,011.
By Friday morning, news started to hit that the United Kingdom voted to separate from the European Union. The news brought a market slide of over 600 points or 3% on Friday -- which continued on Monday the 27th, with the Dow down another 260 points to 17,140.
International markets fared even worse. We were inundated with articles and invitations to phone calls explaining the effects of this break-up. Between our three advisers, we read many articles on the topic and participated in several webinars. The only consensus we came to is that there is uncertainty in the world economy -- and uncertainty makes markets crazy. This craze is clearly demonstrated in the fact that, as I write this blog, the Dow is back up to 17,622 and climbing.
No one knows what the market will do tomorrow. As usual, it appears the initial dramatic reaction immediately after the news was an overreaction.
Perhaps it is because the world is learning that the separation will be months in the making; and it may take several years for the specifics to play out.
Perhaps it is because, although the UK and Europe will face changes as a result of this vote, investors have realized that London is still on the map and there has been no physical damage to their infrastructure, educational system, workforce or business.
Perhaps it is because investors saw an opportunity to buy stocks at a discount.
In reality, it is all of these things, plus many more points of information that are already priced into asset values. Not only do we not know how the separation will unfold economically or politically, we certainly don't know how it will unfold in the markets.
As always, but especially in times of volatility, it is imperative that your portfolio is diversified across asset classes and regions. It is certainly important to be knowledgeable about world events such as Brexit; but we do not recommend making tactical or short-term changes to portfolios based on these events. The recovery of yesterday and today support that policy. If we would have sold out of the market on Monday, we would have missed the 500 point gain made since then. Reactionary moves in and out of the market, rather than well-thought-out investment strategy, are what make individual investors perform lower than the markets over time.
Given the uncertainty, there will continue to be market volatility in the short-term. Brexit will have a negative (short-term) impact on some, but a positive benefit for others. Typically, when a policy decision creates a "loser," it tends to create a subsequent "winner." In the long run, we will continue to rely on the core tenets of our investment philosophy, which are particularly meaningful in times of volatility:
- Market timing is impossible; and over time markets are efficient. Staying the course pays off.
- Risk in a portfolio should be tailored to each investor's specific circumstances and utilize globally diversified asset classes using broadly diversified low-cost funds.
- The factors of return we emphasize (equities vs bonds, small cap vs large cap, and value vs growth) are alive and well and not impact by events like Brexit.
- Maintain perspective and long-term discipline by re-balancing in regular intervals to capture moves in the markets.
There will be more of these reactionary market slides in the future. So, what should you do? Take a deep breath, wait for the next world event and put your feet up, as always, knowing you have a well-thought-out investment strategy in place.