The British referendum vote, frequently referred to as Brexit, held late last week to decide whether or not the U.K. should remain tethered to the EU will certainly be remembered as a historic moment. However, the story of Britain’s exit from the EU is far from over. In fact, the story is only just beginning.
There are still a number of decisions that will be made in the coming months that will help illustrate what Britain and Europe’s political and economic landscape will look like moving forward. For instance, we don’t know the timing of when the U.K. will invoke Article 50, the statute which starts the two-year long divorce process from the EU. We don’t know if Scotland will remain part of the U.K. or decide to separate and join the EU. And we don’t know who will be the Prime Minister of the U.K. after current Prime Minister David Cameron announced his plan to leave the office in October.
Here’s what we do know: It is likely that world markets will experience a period of uncertainty in the coming months. This uncertainty will almost certainly lead to higher levels volatility, as the U.K. and rest of Europe navigate the various aspects of Britain’s vote that haven’t yet been decided.
In fact, it’s rather stunning how ill-prepared all parties appear to have been for a victory by the “leave” campaign. Even the architects of the “leave” campaign who achieved their goal seem a bit shocked by the results of the referendum which hasn’t exactly helped settle global markets.
Is It Too Late To Reduce The Risk In Your Portfolio?
It’s normal to have had your emotions stirred up after the massive selloff in global equities on June 24. But, if the selloff is provoking significant fear and you now want to sell everything, now is still a good time to reassess the overall risk tolerance in your portfolio. The market still remains at relatively high levels, making this an okay time to reduce risk if you feel you need to.
That said, while it makes sense to reassess your risk tolerance during times of stress, it doesn’t mean you should make major asset allocation adjustments too frequently that are based on negative headlines in the media. Instead, I would argue that if you alter your long-term allocation more than once every five years, you’re probably reacting either too frequently or are making too many emotionally based decisions.
Diversification May Help You Win During Periods Of Volatility
The market movement on June 24 also served as a good reminder that diversification matters. Owners of “safe haven” investments, such as bonds, cash, Japanese Yen, gold and managed futures fared well as investors rushed into these safer assets.
Over the long-term—ten or more years—equities should have a return advantage over bonds and cash, but if an investor is unable to handle the swings that take place in the stock market in the short term, they may sell out of the market, thereby forgoing that long-term advantage.
As the layers of complexity are analyzed and negotiations are finalized, we know there will be opportunities connected to the Brexit. One could argue the European region minus the U.K. has the opportunity to grow via multiple channels.
For example, it’s likely that Paris and Frankfurt will now be competing to take London’s place as the financial capital of the Euro region. Additionally, several large banks, including JP Morgan and Goldman Sachs, have already announced plans to reduce their head count in London over time. It’s likely that those roles will be transferred to financial hubs that are still part of the EU.
It’s quite possible that increased competition among all factions will lead to increased growth for the companies of the continent, which in turn could lead to profitable opportunities for investors that are able to embrace today’s uncertainty.