On June 23, the citizens of the United Kingdom voted to leave the European Union. While there has been much speculation, many of the longer-term implications of the referendum remain unclear, as the process for negotiating what a UK exit might ultimately look like is just beginning.
Geopolitical shocks like the one Britain delivered can generate profound uncertainty that doesn’t sit well with equity markets. It is normal for equity markets to react (and sometimes overreact) drastically to new and shocking events.
While market instability can stir up negative emotions, maintaining a long-term perspective makes the volatility much easier to handle. Whether we like it or not, market turbulence is part of long-term investing. One important lesson to take from the history of such destabilizing events is this: This, too, shall pass.
As part of our ongoing client approach, we would like to update you with a few points of interest that we have observed in the past few weeks, more specifically:
- How our diversified portfolios performed on the Friday & Monday after the referendum vote.
- How markets reacted 1 week, 4 weeks and 12 weeks after previous 5% (or more) market declines.
1. How our model portfolios performed on the Friday & Monday
While equities were down, exposure to fixed income and to the USD helped diversified portfolios.
| TMA Model Portfolio Allocation | YTD return up to June 23rd, 2016 (the day before the referendum) | YTD return up to June 27th 2016 (including the referendum results) | Brexit impact (24th and 27th) since referendum |
|---|---|---|---|
| 100% Bonds | +3.23% | +4.33% | +1.10% |
| 30% Equity 70% Bonds | +3.02% | +2.30% | -0.72% |
| 50% Equity 50% Bonds | +3.52% | +1.69% | -1.83% |
| 65% Equity 35% Bonds | +3.38% | +0.64% | -2.74% |
| 75% Equity 25% Bonds | +2.51% | -0.96% | -3.74% |
| 100% Equity | +2.40% | -2.52% | -4.92% |
(Actual client portfolios may differ due to slightly different allocations. These numbers are before TMA management fees)
2. How markets reacted one week, 4 weeks and 12 weeks after previous 5% market declines
Below is a list of thirty, 5% (or more) market declines dating back to 1980. These dates include many events that stirred market uncertainty at that particular time. Some events were market-related while others were financial or geopolitical. Bottom line – at each of these moments, patient and disciplined investors did best.
| Date | Next Week (%) | Next 4 Weeks (%) | Next 12 Weeks (%) | |
| 7-Mar-80 | -5.95 | -1.38 | -4.44 | 4.06 |
| 12-Sep-86 | -7.91 | 0.67 | 2.09 | 8.89 |
| 9-Oct-87 | -5.18 | -9.12 | -19.50 | -20.57 |
| 16-Oct-87 | -9.12 | -12.20 | -13.11 | -13.90 |
| 23-Oct-87 | -12.20 | 1.44 | -2.51 | 1.54 |
| 4-Dec-87 | -6.83 | 5.09 | 10.34 | 17.21 |
| 13-Oct-89 | -7.01 | 4.06 | 1.64 | 5.57 |
| 28-Aug-98 | -5.00 | -5.18 | 1.71 | 13.28 |
| 4-Sep-98 | -5.18 | 3.61 | 2.95 | 22.43 |
| 15-Oct-99 | -6.63 | 4.35 | 11.92 | 15.56 |
| 28-Jan-00 | -5.63 | 4.72 | -1.97 | 5.47 |
| 14-Apr-00 | -10.54 | 5.75 | 4.75 | 9.02 |
| 16-Mar-01 | -6.72 | -0.93 | 2.87 | 9.95 |
| 21-Sep-01 | -11.60 | 7.78 | 11.15 | 16.29 |
| 12-Jul-02 | -6.84 | -7.99 | -1.38 | -13.11 |
| 19-Jul-02 | -7.99 | 0.60 | 9.56 | -1.47 |
| 18-Jan-08 | -5.41 | 0.41 | 1.87 | 0.58 |
| 3-Oct-08 | -9.38 | -18.20 | -11.87 | -20.60 |
| 10-Oct-08 | -18.20 | 4.60 | 3.53 | 3.62 |
| 24-Oct-08 | -6.78 | 10.49 | -8.75 | -3.04 |
| 14-Nov-08 | -6.20 | -8.39 | 0.74 | -0.54 |
| 21-Nov-08 | -8.39 | 12.03 | 10.98 | 3.35 |
| 20-Feb-09 | -6.87 | -4.54 | -0.20 | 14.65 |
| 6-Mar-09 | -7.03 | 10.71 | 23.28 | 34.50 |
| 5-Jul-10 | -6.39 | 2.23 | -4.14 | -0.84 |
| 2-Jul-10 | -5.03 | 5.42 | 7.73 | 12.33 |
| 5-Aug-11 | -7.19 | -1.72 | -2.12 | 7.15 |
| 23-Sep-11 | -6.54 | -0.44 | 8.96 | 7.32 |
| 21-Aug-15 | -5.69 | 0.08 | -1.15 | 6.26 |
| 8-Jan-16 | -5.86 | -2.14 | -2.76 | 6.55 |
| 24-Jun-16 | -5.39 | ? | ? | ? |
| Average | 0.39 | 1.41 | 5.05 | |
| Median | 0.64 | 1.68 | 5.92 | |
| % Positive | 60.0% | 56.6% | 73.3% |
Being a part of a winning investment philosophy:
We always focus on beneficial actions that we can control (with you) and that will have a positive impact on your long-term investment experience, such as:
- Ensuring that you have a long-term investment strategy
- Focusing your investment strategy on asset allocation
- Maintaining highly diversified portfolios
- Tilting your portfolios to higher expected returns (by including value and small companies)
- Rebalancing your portfolio to your long-term investment strategy
- Focusing your efforts on your long-term retirement cash flow needs
- Maintaining tax-efficiency with your investments
- Being mindful of investment costs
We stay away from activities where we cannot control outcomes, such as:
- Forecasting the direction of markets
- Trying to time the movement of markets
Below are a few points to consider and know:
- Not to be mistaken with market timing, but you should consider adding funds to your portfolio (if you have cash from savings, employment bonuses etc.) so that we can invest at these lower levels. When stock prices go lower, the expected stock returns from that point forward is “higher”.
- As part of our regular rebalancing process, we are currently reinvesting your most recent portfolio dividends
into mostly international stocks. This rebalancing process allows us to add funds to the asset class that is lagging, thereby adding value to your long-term portfolio returns.
Thank you for your confidence in us. We hope that you find this note informative and helpful. Please do not hesitate to contact us should you have any questions. We are all here to help.