Thirty Days After the Brexit Vote – What Have We Learned?

One month ago, we updated you on the Brexit vote. We commented on:

1.  How our diversified model portfolios reacted to the news
2.  How markets have historically reacted after previous 5% corrections
3.  How using long-term perspectives and a winning investment approach are key to getting better long-term portfolio returns. See full June 27th 2016 Brexit article here.

On June 23rd, citizens of the United Kingdom voted to leave the European Union. The two trading days that followed the referendum vote saw various global equity markets fall between 4 and 8%. Media sources reported and hypothesized on the long-term implications of the referendum. There was much hype and noise – and in hindsight a market overreaction. A month later the investing world is a calmer place.

How have our model portfolios performed year-to-date?

Portfolios have roared back since the lows of the post Brexit vote. The below chart shows how portfolios have appreciated since the market low (June 27^th, 2016) after the Brexit vote.

(** FI is fixed income and E is equity)
(Actual client portfolios may differ due to slightly different allocations. These numbers are before TMA management fees)

Geopolitical events like the one Britain delivered last month can generate profound uncertainty. We have seen it many times before and we will see it many times in the future. The equity bull market that started after the 2008/2009 credit crisis has had to climb the wall of worry on many occasions, notably; the 2010 & 2012 European Debt Crisis, the 2013 U.S. Debt Ceiling crisis, the 2014 oil crisis, the 2015 Greek referendum, the 2016 China growth worries, and most recently Brexit.

What is common in all these situations? In all, there is clearly the potential for changing geopolitical structures. This raises possible risks. This can most definitely have a direct impact on how countries, citizens, and industries are governed and operated. What is completely unknown during these risk periods is what will be the INVESTMENT OUTCOME of various asset classes. As uncomfortable as it may feel during these periods of higher perceived risk, the truth of the matter is that nobody (including all the market experts you see on TV or read about in the papers) can accurately predict what will happen to asset prices. Why not? There are simply too many interrelated moving parts (including government and central bank policies) that will have an impact on investments but are simply unpredictable at a given time.

How should one prepare for these risk periods?

In the movie Gladiator, Maximus told his fellow gladiators in the recreation of the Battle of Carthage that they must stay together to survive the onslaught of their better armed attackers. He told them to “hold” and resist the natural temptation to run away from their group. In the scene, those who tried to fight alone were easily killed off, while those who stayed together were victorious. See YouTube clip here.

We see parallels in the investing process, although of course with much fewer Hollywood effects! Investor temptations can often lead to deviations from an investment philosophy. Stay the course with your investment philosophy. Together we will stay focused on what we can control (long term asset mix, rebalancing, exposure to factors, tax, & planning), and not get distracted by events and outcomes we cannot control.

Thank you for your confidence in us. We wish you a wonderful summer ahead. Enjoy your time with family and friends! Please do not hesitate to contact us should you have any questions. We are all here to help.