I’m posting today in response to the vote in Britain to leave the European Union, which surprisingly passed 51-49 yesterday. This action has roiled global markets today and I wanted to reach out with some thoughts.
Looking at foreign equities, the Vanguard Developed Markets ETF (ticker: VEA) is down 7% this morning. It is undoubtedly a significant and painful drop. The ETF is recently trading at $34.35 a share. To put this in context, the same shares traded as low as $34.02 on June 16. So all we have done today is give up the past eight days of gains. It is not the devastating loss that news channels would like to have you believe.
I do however anticipate further volatility next week, especially on Monday morning, after more panic sets in over the weekend. As an investor, we accept the reality that corrections of 10% or more are a common occurrence, and in fact, swings of 10% or more occur in a majority of years. In the long run, events like the Brexit are nothing more than noise which unfortunately distracts investors from staying focused their long-term goals.
If you have cash on the sidelines, I’d suggest placing orders to add to a diversified asset allocation in line with your goals and overall risk tolerance. That’s what I’ve been doing this morning: placing limit orders to add to our existing ETF positions for clients who have cash in their portfolios. We have not sold any positions and discourage investors from selling based on today’s news. While the Brexit vote increases uncertainty in Europe, the actual implications for the drivers of investment growth – corporate earnings and balance sheets, economic fundamentals, and credit conditions – remain largely unchanged.
Our investment philosophy is based on the significant evidence of the importance of asset allocation and diversification. While we are strategic in our model portfolios, we can and do adjust the weightings of asset classes in a contrarian manner. We want to buy (or “overweight”) those assets which are the cheapest and typically, have performed the worst recently. If European stocks weakens further, we will actually consider increasing our allocation.
Even without changing our Portfolio Model targets, our discipline is to rebalance portfolios if the categories move more than 10% away from our target weightings. To actually profit from volatility, you have to view events like today as an opportunity. That is easy to do in hindsight, but difficult to do in the present, unless you have a rigorous and systematic approach.
I am happy to report that my phone is not ringing off the hook this morning. Hopefully, the consistent message of the reasons and benefits of sticking with your plan are being heard. If you want to talk about your portfolio, have a question, or just want to catch up, please don’t hesitate to give me a call or send me a note. Otherwise, keep calm and carry on!
P.S. If you aren’t currently a client of Good Life Wealth Management, I’d like to share with you the benefits of having your own financial plan. Investing should be tailored to your needs, which only happens after you have an individual plan! Call me at 214-478-3398 or reply to this email.