Everyone knows that Brexit is an abbreviation of “British exit” and refers to Britain’s vote to withdraw from the European Union. When the UK voted to leave the EU the stock markets reacted around the world.
On Thursday June 24th the day after the vote, most markets were down and lost even more through Monday the 27 th.
- ◦SPDR S&P 500 ETF Trust (which follows the index of the 500 largest companies in the US) dropped 5.3%.
- ◦iShares MSCI United Kingdom ETF dropped 15.4% of its value.
- ◦Vanguard Developed Markets Index Fund Admiral Shares, which tracks an index of Non-US developed markets, was down 9.9%.
The two important questions to ponder are:
Why did the stock markets go down?
The simple reason is that investors over react! When the voters of the UK voted to leave the EU, no one knows what impact that will have on the economy of the UK, the other members of the EU or on the US. If no one knows what the terms and conditions of the exit will be negotiated, how can anyone know the impact on the various economies and their respective stock markets? They do not and cannot.
The falling stock price is a response to the unknown and the resulting uncertainty. With uncertainty comes risk. Some investors chose to sell stock and go to cash or the safety of US Government bonds. How were these folks treated? Not well because in the following four days:◦
- ◦The S&P 500 was up 5.17%.
- ◦iShares MSCI United Kingdom ETF, EWU was up 9.86%
- ◦Vanguard Developed Markets Index Fund was up 6.2%.
What difference does this make to those who are invested for the long term?
The answer is, absolutely no difference in the long run. There will always be events that have short-term impacts on the markets. Take the beginning of 2016. From the beginning of the year through most of January, the S&P 500 was down 10%. But what happened in the next month? It was up 11%. Did you as an investor worry during January? Was it worth the worry? I would bet not.
The key to peace of mind during market down turns is to:
- Have the correct allocation in your portfolio from asset classes with little risk to those that have more risk so that the risk of the overall portfolio is appropriate for your situation and goals
- Rebalance the portfolio to stay in balance
- Be tax efficient
- Monitor your holdings, and make changes if appropriate
- Stick to your investment plan for the long term.
- Do not listen to the talking heads on the nightly news, the radio, or online.