What should investors do now about Brexit (the U.K. vote to leave the E.U.)?
We continue to suggest that they follow the advice we published the day the Brexit vote was announced: Keep Calm and Carry On .
Reflecting back on this week’s events, however, maybe we should have titled the piece, Focus on What You Can Control.
First, the vast majority of the haloed prognosticators you see on CNBC, etc. got the Brexit vote wrong. As I have written about many times in pieces such as Groundhog Day, the accuracy, or maybe I should say inaccuracy, of Wall Street estimates consistently reminds me of the saying, “Never in doubt but often wrong.” To reinforce this point, John Authers of the Financial Times wrote the following today: “Populations across the world have lost faith in the expert guidance of professional economists.” (click here to read his full piece).
Second, you are likely to damage both your mental state and your portfolio if you make investment decisions based on all too common yo-yo like financial headlines such as the following from this past week:
- The Brexit Danger
- Dow, S&P500 on Pace for Best Week in 2016 Post-Brexit
- Reasons Not to Chase Rallies Post Brexit
They remind me of the titles of the articles below that appeared only two days apart earlier this year:
- “Wall Street rallies as Yellen’s comments suggest that the Fed is unlikely to raise rates.”
- “Wall Street falls as the strength of payroll data suggest that the Fed is likely to raise rates”
The moral of both those stories should have been:
Remember, “projections are based on estimates” (yes, estimates based on estimates) and “assessments have a considerable amount of uncertainty” (both are recent direct quotes from Janet Yellen, Chair of the Federal Reserve – for more see Should You Treat Wall Street Forecasts Like April Fool’s Day Jokes?).
So, what should you be focused on that is within your control?
Your long-term plan, not the models or projections of others.
I know it’s hard to not get caught up in the emotion of the market, but try to remember the old saying, “Investors create 50-year floods every few years” (yes, it’s OK to smile when you think about the words “investors create”).
As was the case this week, when Brexit-like floods happen, my firm gets calls asking for our opinion about where the market will go next.
We don’t have a crystal ball, but we are always willing to make this prediction.
Whenever you see large market swings you will see:
- Sensational headlines that are designed to catch eyeballs and sell ads, but that are often not conducive to good investing
- Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or product when emotions are high
- Investors being sold short-term ideas that harm long-term returns
If and when these predictions come to pass, you might be wise to remember the tag line of the drug-related public service announcement from the 1980s, “Just Say No”.
To help, below is a graph that illustrates what all investors feel from time to time (professionals included).
To highlight this cycle, this week more than one person called us to ask if they should sell (last weekend and Monday and Tuesday). These calls were followed by calls and emails from some of the same people at the end of this week asking when they should buy. Yes, as many studies show and the graph above illustrates, investors have the tendency to sell low and buy high.
We aren’t sure what the next few weeks or months will bring, but along the lines of the picture above, at some point more “alarmed” comments will be published again.
When this happens, try to remember that even though it can seem boring, if you resist emotion and stick to your long-term plan, the slow and steady tortoise often comes out on top.
If you kept calm this week, you would have been “relieved” to find that the value of your portfolio had likely gone up. In addition, you would have avoided “frightened” selling for a loss (see the below graph of the last five days of price movements of the DJIA – the red circle represents the panic selling early this week).
Source: Wall Street Journal
In-line with this week’s focus on the U.K., as long as you have a well-diversified, long-term plan that is designed to meet your goals, keep in mind the following age-old investing quote from a well known British writer:
“My ventures are not in one bottom trusted, Nor to one place; nor is my whole estate … Therefore, my merchandise makes me not sad.” – William Shakespeare, Merchant of Venice
For more on our thoughts, including a more contemporary quote from my 11-year old son following a 500+ plus point market drop last year, click on the following. It also includes evidence of just how unwise investors’ timing decisions have been.
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