"The dumb money effect... bad timing is at the heart of this."

The UK leaving the EU… not a time for panic

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Yesterday, we woke to news that the citizens of the UK have voted to leave the European Union. While polls hinted that the ‘Leave’ camp may win the day, financial markets were prepared for a ‘Stay’ victory in the weeks leading up to yesterday’s referendum.

As a result, global financial markets have been suddenly thrown into a period of significant turmoil and uncertainty.

Whenever such an event occurs (and they DO occur on occasion), two primary drivers spring into action to spark market volatility:
1. The financial fundamentals of the region are put under scrutiny given a new reality… what had been the financial trajectory has been suddenly altered, and analysts are forced to re-model their expectations for the future within a new paradigm; and
2. Emotions push investors toward irrational, fear-based reactions that may prove later to have worked against their best interests.

Without doubt, there are many questions to which the answers are unclear, and will remain unclear for some time. All the ripples radiating from this stone in the pond will take a while to be sorted out, and for most of us, the consequences are beyond our control.

Which leaves us with asking what we CAN control:

1. The reasons you are investing probably remain unchanged. If your account clearly aligns with your goals, the potential for days such as this has been built into the strategic design. We encourage you to resist the urge to make short-term, knee-jerk alterations to your portfolio. Looking back to our last ‘black swan event’ in 2008, those with the greatest regrets were those who abandoned their investment strategy out of fear. They were left on the outside looking in as the markets recovered over the following months and years.

2. History is on your side. Without exception, each time there has been a period of financial uncertainty, there has been a recovery soon on its heels. Investors who stay the course will be in the game when the markets start their recovery back to proper levels.

3. Stay invested and avoid trying to time the market. Studies repeatedly prove that the average investor severely under-performs the investment returns of virtually every sector in the market… yet how can that be?  Over the past 20 years, the average stock has generated an average annual rate of return of almost 8%; the average bond over the same time period, 6.5%.  Yet the average investor’s rate of return has been just under 2.5%… how can that be? As investors move in and out of investments based on hunches, short-term crises or media hype, we see the “dumb money effect” in action:

“people tend to invest when things are good and they tend to pull their money out when things are bad. Because they invest when things are good, they then have subsequent under-performance.  Then they pull their money out when things are bad so they miss the subsequent rebound. So, the dumb money effect basically says that people do what they should not do all the time. Bad timing is at the heart of this.”Michael Mauboussin

4. Notice the flashing blue light. I worked at Kmart as a kid (remember them?), and every so often they had ‘flashing blue light specials’. We woke up this morning to a new environment where plenty of good companies are on sale for less than their true value. This represents a buying opportunity for the long-term investor.

5. Dollar-cost average to reduce your risk. Investing the same amount on the same day each month will, over time, reduce the average cost of your portfolio. If you are in the “wealth accumulation” phase (pre-retirement), the value of your portfolio today is less important than the number of shares or units you can gather. Buying fewer when the price is high and more when the price is low is the reward of dollar-cost averaging.

In Summary, history repeatedly shows us that quality will regain its true value. If you have a well-diversified investment portfolio of quality holdings, our recommendation is to avoid making a knee-jerk reaction and succumbing to economic fear. Holding on to quality investments and a strategically sound portfolio will be rewarded, and if you are feeling anxious to make a change, speak with your financial advisor for a longer-term perspective.