I watched in shock as the Brexit results were reported Thursday night. Then, on Friday morning, I watched as stocks tanked.
Global equities, especially foreign, tumbled. Money poured into safe havens, such as U.S. Treasuries. I knew advisers would be wondering if they should get their clients out of the stock market until the uncertainty vacuum dissipates. I say “don’t even think about it!”
It’s not that I have a clue whether the market reaction is an overreaction, or the beginning of a bear market. Frankly, nobody else does either. The Brexit could have minimal, short-term economic impacts, or could signal the beginning of the end for the EU, leading to long-term impacts such as another great recession or worse. But trying to forecast economic events, and then moving in and out of markets based on those forecasts, has proven to be a fool’s game. The only thing more foolish would be to sell after markets tank, which is an all too human response and tradition.
I’ve been asked about avoiding Europe until the dusts settles. Sure, I just said it could be the end of the EU, but I firmly believe our clients need a global portfolio that includes Europe. On Friday, the iShares Europe ETF plunged 10.97% and selling now is just a more sophisticated way of performance chasing.
PERSPECTIVE AND DISCIPLINE
QuoteMoving in and out of markets based on those forecasts, has proven to be a fool's game. I firmly believe our clients need a global portfolio that includes Europe.
Look at Friday’s market with a little perspective. Even in the short-run (less than six months), US stocks and international stocks only lost 1.65% and 2.50% respectively for the week, as measured by the broadest of the Vanguard Index Funds (VTI and VXUS). For the year, US stocks are up 0.65% which measure? S&P500? and international down by 3.60%. If your clients want to panic and sell, then they shouldn’t be in stocks in the first place.
And what if Brexit triggers a global recession and bear market? My answer is that you’d better toughen up your clients now to do the unthinkable, which is buying stocks after the collapse.
Though we all know that disciplined rebalancing works, data indicates most planners do just the opposite. For example, advisers in one RIA platform had an average of only 26% cash and bonds at the height of the real estate / financial bubble, but upped it to 51% at the bottom, just as the great bull market began.
I am frank with my clients and readily admit that I know I don’t know the future. That’s why I typically put them in balanced portfolios and stress the importance of sticking with that balanced allocation no matter what they read, hear or see.
If you have your clients heavily in equities, now would be a good time to build that more balanced portfolio in case this is the beginning of a bear market. Don’t make the same mistake so many advisers did during that last nasty bear market, or avoid high-quality bonds now because you thought rates will rise.
Prepare your clients for uncertainty – during this crisis and the ones beyond. Remind them of Warren Buffett’s statement “be fearful when others are greedy and greedy when others are fearful.” Tell them how hard it is to buy when the herd is selling. I’ll admit that in late 2008 and early 2009, buying more stocks was the hardest thing I’ve ever had to do for my own portfolio – something that was 1,000 times scarier than this little Brexit blip has been so far. It’s times like these that separate the speculators from the investors. Make sure your clients are investors.