Friday was an interesting day for Britain (and Europe) and as we all know, the Brexit vote has had an immediate impact on bond and sharemarkets around the world.
These are the very kinds of market events our clients’ portfolios are built for. We never take risks that aren’t worth taking and the portfolios we construct are built to be resilient and durable through all market conditions including unexpected events such as this. Whilst this kind of market volatility is undesirable, it is not new and because the portfolios we recommend are so well diversified, they are built to withstand all sorts of market events, including ones such as this.
In these times, it is valuable to remember the seven simple truths of investment:
1. Don’t make presumptions
Remember that markets are unpredictable and do not always react the way the experts predict they will. When central banks relaxed monetary policy during the crisis of 2008-09, many analysts warned of an inflation breakout. If anything, the reverse has been the case with central banks fretting about deflation.
2. Someone is buying
Quitting the equity market when prices are falling is like running away from a sale. While prices have been discounted to reflect higher risk, that’s another way of saying expected returns are higher. And while the media headlines proclaim that “investors are dumping stocks”, remember someone is buying them. Those people are often long-term investors.
3. Market timing is hard
Recoveries can come just as quickly and just as violently as the prior correction. For instance, in March 2009—when market sentiment was at its worst—the US S&P-500 turned and put in seven consecutive months of gains totalling almost 80 per cent. This is not to predict that a similarly vertically shaped recovery is on the cards every time, but it is a reminder of the dangers for long-term investors of turning paper losses into real ones and paying for the risk without waiting around for the recovery.
4. Never forget the power of diversification
While equity markets have turned rocky again, highly-rated government bonds have flourished. This limits the damage to balanced fund investors. So diversification spreads risk and can lessen the Brexit bumps in the road.
5. The stock market and the economy are different things
The world economy is forever changing and new forces are replacing old ones. This applies both between and within economies. For instance, falling oil prices can be bad for the energy sector, but good for consumers. New economic forces are emerging as global measures of poverty, education and health improve.
6. Nothing lasts forever
Just as smart investors temper their enthusiasm in booms, they keep a reserve of optimism during busts. And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes. As always in life, moderation is a good policy.
7. Discipline is rewarded
The market volatility caused by Brexit is worrisome, no doubt. The feelings being generated are completely understandable and familiar to those who have seen this before. But through discipline, diversification and understanding how markets work, the ride can be made bearable. At some point, value re-emerges, risk appetites re-awaken and for those who acknowledged their emotions without acting on them, relief replaces anxiety.
In the end, making reactionary investment decisions is dangerous and we never bet against economic progress or human ingenuity. For this and the above reasons, we absolutely believe long term investors are better off staying invested.