7/06/16

One week ago on Friday, the unexpected happened: Britain voted to leave the European Union. The “Brexit”, as it was called, was a global market shock. Most experts thought the United Kingdom would vote to remain. The following morning major markets and currencies plummeted. Some markets had their worst one or two day drop ever. With fear running rampant, what are investors to do with their investments? Here are four time-tested tips to weather this storm.

Don’t Panic

During market downturns, people tend to panic and often make irrational, short-sighted decisions as a result. This may be because fear is a strong emotion that causes us to act quickly without using much rational thought. The problem is that when a lot of investors panic at the same time, markets drop fast and create more intense panic. Often this fear is not grounded in rational thought and investors lose out on long-term gains out of short-term fear. This scenario has played out many times before and it won’t be the last time we see a massive one-day market drop. Indices tend to eventually recover and resume their uptrend over time, so it is important not to panic and stay the course with your long-term investments.

Don’t Day Trade

Day trading may become more appealing to some investors because there can be a lot of money made quickly from the dramatic price swings. When investors let greed get the best of them, however, they might be unpleasantly surprised by the result. For the typical, long-term investor, day trading is both unwise and dangerous. It’s very difficult to correctly guess the direction that any one stock or market index will go, and if you’re not careful, you can lose a lifetime’s worth of savings in a short span of time, leaving you left scratching your head wondering what happened.

Diversify

If there’s one thing a global situation like this emphasizes, it’s the need to have a diversified portfolio. Investors should already have their money in many different types of investments. This includes investing in companies that operate in different industries but also different countries and regions. Diversification helps soften the impact of these types of market moves. The larger losses were realized in Asia and Europe, so having some other investments outside of those markets would have helped investors reduce their risk and their losses.

Keep a Long Term Mindset

Over the long term, markets tend to find support and resume their uptrend. The world has weathered many storms including world wars, the Y2K scare, the collapse of Lehman Brothers and other similar events throughout history. Each time there was a temporary crash that eventually subsided and markets gradually resumed their predictable upward trend. This time should be no different. The world will not end and the UK and EU will eventually work out trade agreements that benefit both parties. Likewise, Britain will not sink into a black hole. They will eventually stabilize their economy, profit again from trade and grow their businesses just like they always have over the course of hundreds of years.

While the Brexit was unexpected and scared plenty of investors worldwide, it isn’t a unique event that has never happened before. Although we may be in for a rocky road and a lot of volatility over the course of the next few months or even years, this market action will eventually subside and begin to march forward once again. The best thing you can do is to remain calm and remind yourself that you are in it for the long haul.

 

The FMB Advisors Blog

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