Markets

Post-Brexit, What Should Investors Do?

Even if this turns out to be the "black swan" event of the decade, it shouldn't change your long-term strategy.

In late June, citizens of the United Kingdom went to the polls and voted in favor of leaving the European Union, or Brexit as it has come to be known. If you are like most Americans, you never gave the issue a second thought in the months leading up to the historic vote. However, if you have a 401(k) or an investment portfolio, you are most certainly paying attention now.

The Brexit vote shocked the markets, driving global markets sharply lower. On June 24, the day after the vote, the Dow Jones industrial average plunged 610 points to 17,401. It was a geopolitical macro event everyone knew was possible, but nobody thought was probable, which only magnifies its global ramifications.

Is Brexit the Black Swan for This Decade?

In How to Protect Your Portfolio Against Black Swans, I described the characteristics of a black swan event—rare, improbable, dangerous and with far-reaching implications—and this event matches the description. Black swan events, by their definition, are market disruptors, sometimes strong enough to change the trajectory of the economy and the markets that track it.

Is Brexit of the magnitude that could cause a recession or trigger stock market correction? No one knows for certain; but it is certain to cast a pall of uncertainty over the financial markets, and we know the markets do not like uncertainty.

In the days following Brexit, the analysts and pundits offered up a mixed bag of prognostications for the post-Brexit landscape, ranging from the direst—a deep recession, the end of the UK and a complete collapse of the EU—to muted uncertainty over trade agreements and corporate profits. Concerns over the EU financial system are boosting the U.S. dollar as a safe haven, which could dampen U.S. exports and corporate earnings, and that could mean a rocky road ahead for stocks. But if you weren't expecting that probability after seven years of a bull market, you aren't being rational.

I wrote the black swan article specifically for these circumstances. It is times such as these that separate clear-thinking, strategy-driven investors from the panicking herd. Who can know if this event will have minimal, short-term impacts or more severe long-term repercussions? We can't know.

What we do know is it is unlikely to have much of an impact on our long-term investment objective. Looking back on some major black swan events, such as Black Monday, the tech bubble, the 9/11 terror attacks or the financial crisis, as devastating they all were at the time, they are all nothing more than blips on the long-term horizon.

There will be more black swan events mixed in with the many macro events that continue to move the markets each year. No one can predict with any degree of certainty when they will occur or the severity of their impact, so it is a fool's game to try to move in and out of the markets to avoid them. Investors who do try tend to capture more of the downside than they do of the upside when the market recovers. In the week since the vote, the Dow has already bounced back some, up to about 17,900 as of July 1.

What Should Investors Do Now?

The very first thing investors should do is stay calm. It is vital that you keep your long-term perspective in place and your fears in check. If you have thoughtfully developed your investment strategy based on your risk profile, and it includes optimal diversification, it remains the right strategy regardless of market conditions.

Second, turn off all the noise. The pundits and gurus don't have your interests in mind when they spout their hyperbole. If only half of them can be right and half can be wrong, how will you know which ones to follow? The only thing that matters is your long-term objective and that you have a strategy to achieve it.

Third, have faith in the future. Since World War II, we have experienced many black swans and a constant barrage of macro events, yet the stock market has still managed to grow 100-fold. Now is not the time to turn sour on the future. The UK will survive. Europe will recover. And the United States will continue to be the engine that drives the global economy. It just might be a little bumpy along the way.

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.

Craig Slayen, a new partner with Cypress Partners, contributed to this article.

About the Author

Pete Woodring, RIA

Founding Partner, Cypress Partners

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.

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