The impact of Britain’s referendum has been felt in the financial markets worldwide. If you listen to the news, read a paper or talk with friends, it is a major topic of current discussion. In our view, the significance of this change is buffered by our belief that The most important factor in successful investing is a well diversified portfolio. While international and domestic stocks are down, U.S. bonds have actually increased in value. By the same token, for those accounts in which we have real estate, that asset class has risen in value, too.
The long-term impact of this change would likely be felt for years to come, assuming that it actually happens. The vote was a “referendum”, which is not binding. Some of the reaction in Britain seems to indicate that the country will not leave the European Union. We will have to wait and see. Britain is under no pressure to act quickly on separation, as the rest of the EU has backed away from forcing a quick change.
With most events, what people really want to know is: “What’s the Deal?” We don’t really know what the deal is yet but it will become clearer with time. As markets understand what is happening and what will happen, they will adjust and become more normal. This kind of turning point may take from one week to four weeks to sink in. Think back to 9/11 when financial markets tanked, only to be back to where they started four weeks later. This event, no matter how momentous, is not a 9/11.
Diversification doesn’t protect us from losing money, but it mitigates the extremes that can take place in financial markets. We believe in broad diversification and use it in your portfolios.
June 28, 2016