By now, you probably heard of Britain’s decision to exit the European Union.
Financial experts and book-keepers all thought Britain would vote to remain, so the results came a shock.
Global markets dislike surprises and reacted accordingly.
The British pound dropped 10%, the largest move ever. European and Emerging markets dropped 6-8% and even the S&P500 was down nearly 4%.
Ironically, British markets (FTSE 100 Index) were down only 3%, presumably because the decline in the British Pound will make British exports cheaper, actually helping British companies in the near term.
Meanwhile, US Bonds held up and Gold popped 5% higher as investors sought safe haven assets.
As I mentioned last month, increased volatility is something that we’ve been expecting.
In the short-term, no one is really sure how exactly Britain will exit the European Union. It’s likely to take two years for this to unfold. And there’s a chance other members of the EU like France and Netherlands might want to exit if they think Britain can pull it off without a major recession.
The Federal Reserve has been looking for an excuse to raise interest rates for over a year now. In September they said they expected to raise interest rates four times this year. And now it seems highly unlikely we’ll see even one rate increase.
I think we might have an equal chance to follow the rest of Europe into negative interest rates.
Over the long term, none of this is likely to have any lasting effect.
Europe has survived two world wars and London remains the financial capital of the world.
If anything, we should heed Warren Buffett’s advice and “be fearful when others are greedy and greedy when others are fearful” and use this an opportunity to rebalance in to International and Emerging Market Stocks.
After nearly nine years in a bear market, they are due for a turn-around. I’m not making a prediction here but regular rebalancing in to undervalued asset classes is part of our investment process. And as I’ve said before, process is the most important (and most frequently overlooked) part of investing.
Even after this severe one-day drop, our portfolios are still positive for the year (although timing of deposits and fees may affect individual returns, and as my compliance officer insists I remind you, past returns are no guarantee of future performance).
But I’m confident the Brexit isn’t really anything to be overly concerned about.
Your investment accounts should contain a fair amount of Bonds, and a small amount of Gold, both of these will provide a ballast for your portfolios and help offset future volatility.
If there is one thing to be concerned about, it’s where to book your summer vacation this year.
The British Pound has declined to 35 year lows, and even the Euro is considerably lower, making it cheaper for Americans to travel to Europe. Take advantage of it.
If you have any questions or concerns about your investments, or retirement accounts, feel free to reach out.
Happy Investing,
Nirav