By now you’ve heard the news that Britain has voted to withdraw from the European Union. The repercussions for the UK could be profound as the island nation finds itself to be an economic and political island this morning.
The vast majority of financial, political and international relations experts warned British voters of the implications of a ‘leave’ vote and they ignored the advice. They chose to act on fear and anger over facts. The emotionally-charged issue of immigration overwhelmed the intellectual arguments.
Our portfolios are global in scope, so they will be affected by this decision. But as with the British vote, we have a choice to make based on fear or facts, and I am a strong believer that you cannot make decisions based on fear. Historically, when important events like this happen, investors and markets can panic and emotions exaggerate behavior. Our role is to put things into perspective and provide balance.
The fact is that US market and economic fundamentals remain strong. US companies make up nearly ¾ of the stocks in our Balanced Portfolio, while British companies are only about 2.75%. We believe in the importance of global investing, but historically, domestic companies have been more stable, so we overweight the USA.
Interestingly, the drop in domestic markets at 11:00 AM EST today, based on the S&P 500 is about 2.5%. However, compared to last Friday the drop is only 0.5%. The bigger impact is on European shares. But even there the drop is not as monumental as you might believe. As of 11:00 AM EST today, based on iShares Europe ETF (IEV) the drop is 9%. But as compared to a week ago, the shares are down only about 4.78%. Nowhere near the armageddon the pundits predicted.
Other thoughts – this will probably delay the Fed’s raising of interest rates, help maintain the strong dollar, force the EU to address its immigration troubles and create buying and rebalancing opportunities for disciplined investors. Britain will lose jobs and the EU will gain as companies move workers out of the UK, potentially improving the EU’s jobs picture. The reality is, though, that it will take years for the UK to disentangle itself from the EU, so ultimately, we won’t know the actual impacts for quite some time.
Overall, our philosophy of spreading out risk between different countries, different styles of investing and different risk levels better helps us to withstand global events like this. In the end, I believe that all risk levels of our investment models are well-positioned and prepared for however this event plays out. We will make changes as necessary, including account rebalancing to take advantage of overreactions in the market.
Below are links to a few articles and research reports I found interesting and helpful this morning.