Written by Forum Financial Management
June 24 , 2016
On the evening of June 23, Great Britain voted to leave the European Union by a margin of 52% to 48% with more than 30 million people voting. Nicknamed Brexit as a combination of the words “Britain” and “exit,” the vote by the United Kingdom to leave the European Union surprised global markets, including U.S. markets, in which the S&P 500 Index was down 2.72% in the first five minutes of trading on Friday. This is in contrast to the strong upward close in world markets earlier this week in anticipation of a vote to remain in the European Union.
Even as we watch this historic event unfold, we can put into perspective what the United Kingdom leaving the European Union will mean today, and in the months and years to come.
It is important to define exactly what is happening with the vote to exit. This is not a default as was the case with Greece. Since Britain does not use the euro and continues to use the pound, it is not a banking crisis. In a June 24 Wall Street Journal article on keeping perspective on the market’s volatile reaction to the vote, Spencer Jakab wrote, “Such events spark a huge rush for protection after the fact.”
The vote may have taken place on June 23, but Britain will not leave immediately. Essentially, the vote has invoked Article 50 that defines rules of exit. According to The Telegraph, “Triggering Article 50, formally notifying the intention to withdraw, starts a two-year clock running.”
With the strong reaction by global markets to the unexpected outcome of the vote, the benefits of having a globally diversified portfolio are particularly evident. For example, the bond portion of portfolios is not only cushioning the downturn in stocks, but also provides rebalancing opportunities to take advantage of lower prices in stocks.
In 2008, Warren Buffett said, “Be fearful when others are greedy, and be greedy when others are fearful.” That is why we caution against reacting in the moment. We expect to hear more about Brexit in the near future and into 2017. Some of what we hear will be based on facts and information, and some news will be based on conjecture and opinion. We view this time now as an opportunity for disciplined investors to stay the course as our long-term philosophy accounts for such volatility.
In moments of uncertainty, it is prudent to remember to focus not only on what is happening right now but also to keep in mind the long term.