It’s hard to fathom why the usually reasonable British decided to jump into the dark by voting to leave the European Union. Markets are having a tough time believing it as well with European markets down 7-8% and a plunge in the British pound by 8%, its biggest one-day loss ever. U.S. markets have dropped 3.5% heading into the weekend.
What will the 52% of British citizens who voted for the Brexit get for their vote? The most likely results will be higher unemployment, a weaker currency, possible recession, political mayhem, the loss of access to a market of 500 million people and a “messy divorce that may take as long as two years to complete” with redrafting of laws and treaties with their former EU members. Furthermore, Scotland and Northern Ireland, who recently voted to remain in the European Union by overwhelming margins, may use this as another reason to become independent of Britain.
At the end of the vote, it was mainly the rural and working class towns who have been hardest hit by the changing British economy, who outvoted the urban Londoners who voted to remain in the European Union. Anger about immigration and global capitalism fueled the Brexit votes. This could have implications for the U.S. elections as well.
What’s next for investors? Expect more volatility as the markets react to news about new British leaders as well as other possible votes on exiting the EU from the Netherlands and even France. Some days the markets will be down; other days it will be up. Valuations of European stocks are not outside of their historical range and as they go lower, they become more attractive.
It is important to remember a few things when markets have these type of down moves:
1. No one who jumps out of the markets during big down days has ever said after five or so years that it was a good move for their overall wealth.
2. If an investor decides to exit the markets until things calm down, it is usually too late to jump back in. Most of the biggest up days in the markets occur when markets are experiencing this type of volatility. As they say, “You have to be in it to win it.”
3. Everyone’s portfolio is designed for these types of unexpected events and while the stock side is swooning, the bonds are performing well. Stock holdings are broadly diversified, so individual company and sector risk is minimized. Taking bets on individual stocks increases portfolio volatility and makes the outcomes even more uncertain than they need to be.
4. It is always important to think long term when investing unless you will be spending the money in the next few years. These bumps come along more often than we like to remember and it is important to keep our eyes on our personal financial goals.