The vote to leave the EU by the UK will have a significant impact on financial markets in the short to medium term and the number of different outcomes should not be underestimated.
The UK and the EU are important trading partners and the terms of exit will be heavily negotiated (likely with an eye towards economic stability).
Markets incorporate new information into prices quickly, but this isn’t to say there hasn’t been and won’t be continued volatility. This decision will have a significant impact on the global economy.
Avoid knee-jerk reactions
I have never been a fan of the knee jerk reaction and as an investment manager, I have seen it before during numerous market events and periods of uncertainty in recent years. In my experience it’s better to avoid allowing short term market movements to impact long-term asset allocation decisions.
Long-term investors recognise that there are always risks and uncertainty in markets and it is unlikely that the long term consequences of Brexit will be quite as awful as some commentators have mooted.
While we will continue to monitor these events as they develop in the coming months, our investment philosophy and approach remain the same.
In particular, we advocate that broad diversification becomes even more important in times of uncertainty because it helps reduce stock and/or issue-specific risk and increases the consistency of outcomes.
The initial reaction of the market has been mixed, with Sterling and some European equity markets falling heavily since the vote, whilst the US Dollar and Gold have strengthened as investors seek safe haven investments.
Central bankers have looked to reassure markets with talk of extra liquidity; however this is likely to have the effect of cushioning the short term impact on indices.
Actually, what I have seen in our lower risk portfolios is a modest rise on the first day after the vote of around 0.5%, while our higher risk portfolios saw a modest drop in the region of 1% for the day.
Falls in Sterling against the Dollar actually lead to assets denominated in Dollars rising for the UK investor (such as US and Emerging Market equities). As UK and European equities dip in value, safer parts of our model portfolios such as high quality bonds and some commodities will rise.
Remain and be rewarded
In this situation it is difficult to know when good outcomes will materialise in the future. By attempting to time the right moment to invest or redeem, you can risk not enjoying the benefits of those materialisations. But, many of those who exit the markets miss the recoveries.
What we have often seen in the past is that investors who remain in well-diversified portfolios are rewarded over time.
As well as building well diversified portfolios, we also find what helps is regularly rebalancing them to bring them back into line with our long term asset allocation. This has the effect of both picking up value and booking profit along the way to smooth out long term returns.
The result of the referendum leaves a lot of uncertainty which will weigh on both economic growth and financial markets. As long term investors we’ve always encouraged our clients not to worry and to try to look through the noise and politicised hyperbole.
This post was written by Steven McGregor, Chartered Wealth Manager for Price Bailey’s Discretionary Portfolio Service. Steven helps clients to gain exposure to the stock market via risk rated portfolios. You can contact him at firstname.lastname@example.org.