About a week ago, voters in the UK delivered a surprise vote and decided to leave the European Union (EU). The vote was a long time coming, with considerable debate and discussion on both sides. The polls were close, but it was expected that Remain in the EU would win. The vote happened, and Leave the EU won a surprise victory.
After the vote, the media went crazy, proclaiming it a crisis. Headlines and news coverage were frantic and melodramatic, and equity markets around the world reacted. Markets declined because the outcome of the vote was unexpected, and it creates both economic and political uncertainly.
From a rational point of view, this decline makes perfect sense. If the outcome of an event is uncertain, investors will require more return for the use of their capital. The way to increase the expected return is to pay a lower price, which is what investors were willing to pay in days after Britain decided to leave the EU (or Brexit).
How long will the decline last? About a week post Brexit, this is relatively easy to answer (and where it is helpful that I tend to be slow and deliberate to react to news such as this). As of about a week post-Brexit, most market indices have returned to pre-Brexit levels or have made up most of their losses. Some have even posted positive performance.
While some people believe that this recent turn of events will have a negative impact on economies around the world, there are some that strongly believe it will lead to more freedom and economic growth. Only time will tell for sure.
What can we learn from the Brexit “crisis”?
- In the immortal words of Yoda, “Impossible to see the future is.” Polls and predictions are often wrong even when they are based on mountains of data.
- Volatility is nothing new. Never let hype and melodrama drive your investing decisions.
- Crises are very common. Ideally, words like crisis and awesome should be used a couple of times a year. But in our culture, these words are so overused they are becoming meaningless, and so you should be prepared to not overreact.
- Keep in mind that companies around the world will always respond to events in ways that serves their best interests. As an owner of stocks, that is exactly what you want. There will be winners and losers and a lot of unintended consequences of Brexit, but predicting them in advance and profiting from the knowledge is almost impossible.
- As always, prudent diversification is your buddy.
- Follow the rules of investing in a disciplined fashion: own equities, diversity prudently, and REBALANCE. Rebalance means to buy when things are low and sell when they are high so you maintain an allocation that is appropriate for your time horizon. Early last week was a good time to buy some areas of the market, as they were relatively low.
So remember: Keep Calm and Never Abandon a Well-Designed Investment Plan!
 Past performance is no indication of future returns. Return figures for about a week are meaningless for the long term.