What Brexit Means for American Investors

The United Kingdom’s recent break from the European Union sent shock waves across the pond as global markets sank on news of Britain’s “Brexit” vote. The recovery was quick, but no one can say for sure how events will unfold from here—politically, economically or financially. Brace yourself for plenty of volatility. But investors who don’t overreact can survive Brexit unscathed, and they may come out ahead

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In the two trading days following Britain’s surprising vote, Standard & Poor’s 500-stock index plunged 112 points, or 5%. But the broad market measure promptly cut its losses. A week after the vote, the S&P had shaved its Brexit-induced loss to less than 1%. At its recent close of 2099, the S&P was up 3% for the year and close to its May 2015 high.

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The market action underscores the importance of not making snap decisions about your investments. “Better to wait for opportunities to be revealed by volatility than to be a part of it,” says Andrew Bell, chief executive of Witan Investment Trust, in London.

Although there may be more gut-wrenching days ahead, similar geopolitical shocks provide an encouraging blueprint, says Jeff Kleintop, chief global investment strategist at Charles Schwab. He points to the Japan earthquake and related nuclear accident in 2011, the U.S. debt-ceiling standoff later that year, and the European debt crisis of 2012. In all three instances, single-digit-percentage market declines on the first day turned into double-digit losses over time, with the S&P 500 losing 16%, 14% and 11%, respectively. But stocks rebounded to their pre-shock levels in three or four months, says Kleintop.

Still, economic growth will likely slow as countries reconfigure their trade and economic relationships, and currencies realign. Kiplinger predicts that Europe will escape recession this year, but the odds are 50-50 for 2017. We expect U.S. economic growth of 1.8% this year, down from an earlier forecast of 2%. The good news for U.S. stocks is that S&P 500 firms derive less than 3% of sales from the U.K., making Brexit a speed bump, not a brick wall, for a resilient market. Here’s what to do if volatility erupts anew, because of Brexit or anything else.

Rejigger your portfolio.

A Brexit-led flight to U.S. securities only intensified 2016’s bond market rally, pushing yields on 10-year Treasuries below 1.5%, down from 2.3% at the start of the year. (Bond prices rise when yields fall.) If your portfolio has strayed from your long-term objectives, consider taking recent heady profits in bonds and moving cash into shares of large U.S. companies.

Evaluate your risk tolerance.

Can you stomach a Brexit-caliber calamity? If not, you may have too much invested in stocks. “This type of financial self-assessment can only be done during periods of actual losses—it can’t be simulated,” says strategist David Lafferty, of Natixis Global Asset Management.

Have a shopping list ready.

Now is the time to buy high-quality dividend stocks, says Hank Smith, chief investment officer of Haverford Trust. Stocks he likes include Johnson & Johnson (symbol JNJ, $121) and United Technologies (UTX, $103). Among banks, which suffered some of the largest Brexit losses, he recommends Wells Fargo (WFC, $47), which does most of its business in the U.S.