You may have seen, heard, or read news concerning the “Brexit” vote, which took place on June 23. The phrase was coined to describe the tightly contested campaign for Britain to stay in or exit the European Union.
In the nail-biting conclusion, 51.9% of Britons chose to leave the European Union, versus 48.1% who voted to remain.
While the vote’s impact on the the U.K. and Europe’s political and economic landscape remains uncertain, the first casualty came from the resignation of U.K. Prime Minister David Cameron. According to a Wall Street Journal report, “Britain’s exit costs the bloc one of its wealthiest members and one of its biggest military powers,” meanwhile the EU is “weighed down with economic and migration crises, turmoil in the Middle East and Russian aggression.”
Brexit follows months of heavy campaigning from both sides. In the run-up to the finale, the expectation of Britain to “Remain” drove global stocks higher, however markets were in suspense until the early morning hours after, when all votes were tallied.
Once the “Leave” vote was final, a dramatic broad-market selloff ensued in response, leaving the U.K. market flat for the week, and ultimately moving global markets downward after a mostly positive week.
How Markets Have Reacted
It’s important to understand that markets have already priced in the news.
London’s stock exchange was founded in 1801, and much like the hyper-efficient U.S. markets, it is already in the correcting process. Going forward, we expect that the FTSE 100, an index of blue-chip U.K. stocks, will likely see rallying moments, as will the pound.
Volatility means more fast moves, both up and down. Markets love to fake-out investors looking for short-term trends in volatile markets.
What does this mean for your portfolios? The average Betterment portfolio has about a 6% exposure to U.K. stocks. After the vote, U.K. markets fell about 5% in local trading. The direct effect of the U.K. currency and stock moves were relatively small.
However, global markets are now tightly correlated. Europe is the U.K.’s largest trading partner, and so both European and American markets will be affected.
What Betterment Is Doing for Your Portfolio
Our portfolio invests in U.K. and European high-quality bonds as well as equities. In the wake of the vote, these bonds are gaining in their local markets as investors look for safety.
Events like these are the reason why we currency hedge your international bonds. The unhedged international bond fund IGOV was down 1%, whereas our currency hedged fund BNDX is actually up 0.6% due to the currency hedges.
As always, our team is hard at work doing the right thing, and actually making the most of a market drop.
What You, as an Investor, Should Do
We strongly believe that individuals who attempt to chase performance and time these types of market events earn significantly lower returns, on average, than steady, calm investors. As Warren Buffett once said, “The stock market is a device for transferring money from the impatient to the patient.”
Your job as an investor, and how you earn higher returns, is to bear risk and stay the course through it. Attempting to get return without bearing risk is one of the best ways to end up with all risk and no return.
While you may feel compelled to act in light of this news, frequent changes to your asset allocation in response to market moves is a short-term strategy that generally proves to be the wrong move. Betterment research has shown that the vast majority of our customers don’t react emotionally to markets. A small minority do, however, and the most active tend to lose about 0.60% per year relative to a more patient investor.
We can’t control or predict what markets will do over a short period, however we can recommend that investors always stay focused on the factors they can control. During the last downturn, we gathered the thoughts of our investing mentors, and it’s worth repeating a few key ones now:
Turn off the news. Stay calm; don’t panic and sell. Ignore most commentary; no one knows what will happen next.
— Jason Zweig, The Wall Street Journal
Take a deep breath. This is completely normal. This is what markets do. These portfolios were constructed when you weren’t anxious. If you’re worried about panicking, it’s better to reduce your risk (say, by 20% stocks) than to move to cash. Just know this likely means you’ll need to save more.
— Ron Lieber, The New York Times
The one certainty is that there will always be some uncertainty. The U.S. budget crisis, the taper tantrum, Grexit, and now Brexit. There will always be some reason to be worried. Investing rewards those investors who invest through the anxiety and tough times. It’s a rare case of where doing less means higher earnings. Rather than fight this truth, enjoy it, and your summer.
Given recent events, I’d consider a trip to the U.K. It’s lovely during the summer months, and the currency move means everything is on sale right now.
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