Post-Brexit: A new take on Independence Day
Ah, Independence Day! On Monday, most of us will hang out the flag, fire up the barbecue, and maybe take in a fireworks display. It’s the quintessential summer celebration in America. In Britain, not so much. Though July 4 has never given Brits a cause for joy, this summer the country has little to celebrate. The Brexit referendum has turned into a complex game of “he said-she said,” and at the moment it’s unclear how the whole thing will play out. As a result, companies are setting plans to flee the UK, the pound has hit an historic low, and analysts are predicting a near-certain recession in Britain.
The contrast to what’s happening in the US is acute. While the news of the ‘leave’ vote sent shock waves through Wall Street, the market has recovered at a speed almost as stunning as Brexit itself. After the news hit last Friday, the Dow ended down 602 (-3.5%) in one day. It was difficult not to assume the numbers would continue to fall. Instead, investors have voted that Brexit is simply no big deal…so far. As I write, the Dow is sitting just over 17,800 after a multi-day rally that has the S&P 500 less than 2% below it’s pre-Brexit close last Thursday. The ability of global markets to shrug off what many considered to be an economic disaster is the best evidence yet that investors may have finally learned one of the most important investment rules: don’t sell on bad news. Acting when you’re in a state of shock almost always has a regrettable outcome. To avoid costly mistakes, let the dust settle before taking action, and stay the course until any ramifications to your portfolio are clear.
I spoke with Jackie and Carl yesterday—long-term clients who have been retired just over 5 years. 42% of their portfolio is in stock, with the remainder in bonds and alternative investments. They’re taking a distribution of $2,500 a month ($30,000 a year) out of their $800,000 portfolio. That’s 3.8% of the $800K. As retirees, it would have been easy for Jackie and Carl to panic as the effects of the Brexit news played out on Friday. After all, they’re on a fixed income, and that $800,000 portfolio declined a little for a couple of days. But if 2008 had any positive value at all, it’s that it taught people like Jackie and Carl how to ride out a storm. When we spoke yesterday, they told me they’d been ready to batten down the hatches, but they weren’t overly concerned; they knew we’d structured their portfolio according to their needs, and they trusted its ability to survive the turmoil.
It was a smart decision. I compared the year-to-date performance of their portfolio last Thursday—just before the Brexit vote was announced—to where it sat on Monday evening—just after Friday’s and Monday’s declines of 602 and 150 points, respectively, that brought the total market decline to 5%. The good news: Jackie and Carl’s account declined just 2% during the same period. The portfolio was designed to survive the bump in the road. By the time the markets closed Wednesday, their overall portfolio was down less than 1% since last Thursday, and even better, it was actually up 3% YTD—more than enough to cover their withdrawals for the last six months and still add to their remaining balance. That’s something to celebrate on Independence Day!
As we head into the July 4th weekend, I’m reminded of the parallels between America breaking away from England in 1776 and Britain breaking away from the European Union today. If the Brits had a stock market 240 years ago and the news of America’s exit had reached the front page of The London Times, would their stock market have tumbled some 30% or more? Perhaps. But eventually things would have worked their way to a sensible conclusion.
Britain still has a lot of work to do to iron out Brexit and the resulting political and economic chaos. The European Union has some major repair work to do as well. In the near future, more pain is sure to come. Yet I expect that just as America and Britain both managed to thrive after 1776, the European Union and Britain will do the same—eventually. And so, I assure you, will the markets. “Keep calm and carry on”…and enjoy the fireworks!