Seven Ways Investors Can Address the Brexit
The Brexit need not vex your portfolio. Here are seven reasons why.
The Brexit! The Brexit! Head for the exit!!!
What other event of such political, financial and investment importance can turn the power brokers of the free world into powerless Chicken Littles? On NPR, a dejected Norbert Rottgen—chairman of Germany's Foreign Affairs Committee and a close advisor to Chancellor Angela Merkel—called the Brexit “the biggest catastrophe an organized Europe has ever faced.”
And that’s saying something, considering that a "disorganized" Europe has survived two world wars, the Bubonic Plague and the fall of the Roman Empire.
Fast forward to 2016, some 16 centuries after Rome collapsed. Is the European Union next to bite the dust?
"Maybe an ultimate break-up of the union would be a better outcome for Europe," says Bryan Slovon, founder and CEO of Stuart Financial Group in the Washington D.C. area. "It’s hard to say at the moment because it’s still far too early to be able to predict possible scenarios."
As for your portfolio, here are seven things to keep in mind as the Brexit unfolds in all its financially gory, headline-grabbing glory.
1) The Brexit is no quick zip. Britain doesn’t officially leave the EU for another two years—an eternity in Wall Street terms. If you follow the wisdom of buy-and-hold investment, there’s no need to sell any of your holdings in a panic, not even those with a strong tie to Great Britain.
To be sure, the British pound has sunk to levels not seen in 30 years. It now trades at an astoundingly low $1.32, nearly half what it did in 1981. But if you stay put, the dip is likely to stabilize in time.
2) It’s time to buy. Really. Billionaire Warren Buffett knows a lot more about investing than the overwhelming majority us.
And the Oracle of Omaha has famously stated, “When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household.” “Who dares to judge an investor who has returned his shareholders 1,826,163 percent in the 50-year period from 1965 to 2014?” says K.C. Ma, director of the Roland George Investments Institute at Stetson University in DeLand, Florida.
So if you’re looking to swipe a page from the Buffett playbook now’s the time to do it, the tremors in Britain be damned. The Brexit vote created “an ugly day in global financial markets,” says Greg McBride, Bankrate.com’s chief financial analyst. “But since nothing will change right away, a market overreaction presents an attractive buying opportunity.” Speaking of which…
3) Stock markets always react to developments in foreign economies. Just in case your memory has faded, let’s look back to August 2015 and the infamous “flash crash.” That time, the culprit was slower-than-expected growth in China—and no Great Wall of Wall Street could keep China’s economic woes from impacting U.S. markets. The flash crash kept the media busy dredging up dread: To quote the Washington Post coverage, “In a blink, mayhem descended.” For brief a period, the Vanguard Consumer Staples fund was down 32 percent.
That was all evidence most market watchers needed to make them wary of “the China Syndrome.”
“Clients are curious about the Brexit move but are not making any knee-jerk responses,” says David Madee, a financial advisor in Summit, N.J. “Investors who’ve been in sensible, long-term portfolios will not suddenly buy or sell because of Britain leaving the EU.”
4) If you’re going to worry about an overseas economy, China’s the one. OK, so Britain’s economic engine is large: $3.0 trillion as of 2014. But’s it’s a third the size of China, which weighs in at a staggering $10.4 trillion and represents close to 17 percent of the world’s economy, according to Trading Economics. So whether or not investment Brexit brooders like it, the fact is this: When Shanghai sneezes, Wall Street doesn’t just catch a cold—it turns into a stark raving hypochondriac.
Thus it’s wise to monitor the latest reports from China carefully—much more so than anything coming out of the Land of the Union Jack.
“The market is increasingly worried that the world is about to go back into recession,” says Gary Tsarsis, a clinical assistant professor at the University of Pittsburgh’s Katz Graduate School of Business. “And the primary reason is the slowdown in China. Its 6.8 percent GDP growth is the slowest rate in 25 years. This will adversely affect most countries, in particular emerging markets.”
5) Britain has always had an independent streak. Even when all was hunky dory in EU-land, Great Britain refused to adopt the euro as its currency in 1999, the year it was introduced. Even as Italy abandoned the lira, France the franc and Germany the mark, the UK was one of three European states at the outset that opted out of the euro (Sweden and Denmark being the other two). Of those three, Britain was the heavy hitter economically and cited a laundry list of reasons ranging from the inability to control interest rates to encroaching on its ability to compete internationally. Given that defiant stance—worthy of the UK’s national animal, the British bulldog—the day when Britain would consider departing the EU was almost in the cards from the very start.
6) Practice your rebalancing act. Selloffs such as the one that accompanied the Brexit are all too common during slumps, but that represents a fine opportunity to reflect meaningfully on your portfolio balance. When bond prices rise and stock prices decline, for example, “It might be a good time to shift some money from bonds to stocks,” says Jim Wright, president and chief investment officer at Harvest Financial Partners in the greater Philadelphia area. “This is especially true if your portfolio is not in line with your targeted asset allocation.”
7) When all else fails, quote Shakespeare. Given, the Bard was no financial guru. But at least one of his famous lines from King Lear seems fitting to sum up the Brexit. Here’s a perspective from John Graves, a Ventura, California-based financial advisor and author of The 7 Percent Solution: You Can Afford a Comfortable Retirement. “The British phoenix has built its nest and set it alight. What emerges will be a stronger, more unified Great Britain.”
And as for those panicky pundits of Brexit anxiety? “As Shakespeare said so well,” Graves notes, “they are ‘full of sound and fury, signifying nothing.’”
Lou Carlozo is an investment reporter for U.S. News & World Report, a former managing editor of AOL's WalletPop personal finance website, and formerly the "Recession Diaries" columnist at the Chicago Tribune. His work has appeared in Reuters Money, Money Under 30 and H&R Block's Block Talk. You can follow Lou on LinkedIn.