Never was the advice to hurry up and do nothing more appropriate than in the aftermath of the Brexit vote last Friday (our time). The result was unexpected both in the UK and on financial markets, and as a result we saw immediate falls in the sharemarket as investors tried to understand what the impact would be.
The airwaves were full of talking heads death riding the market, including claims that this may herald the start of a bigger downturn than the GFC. Our market fell 3.17% on the Friday, and the weekend carried plenty of predictions for further falls.
What has been the result over the past week though?
In spite of the doom and gloom, our sharemarket (ASX200) is only 0.65% lower after today’s (1/7/16) close than it was at the close of trade last Thursday i.e. before the results of the Brexit vote were known. Looking at overseas markets, the US Dow Jones is down 0.45% and the Hong Kong market is down 0.36% – barely a blip. Even those at the centre of the uncertainty are down modestly, with the UK’s FTSE down 2.56% and the German DAX down 5.63%. So doing nothing over the past week has seen you end up pretty close to back where you started.
This is hardly the global catastrophe the papers forecast, but you wouldn’t know this from looking at the news from this week. The news agencies know that fear drives sales, and so good news stories like a gradual recovery get very little traction and publicity compared to headlines screaming about a ‘Market Meltdown’ or ‘Trillions of dollars wiped off the value of sharemarkets’.
We don’t know what the long term fallout will be from the Brexit vote, and it’s reasonable to estimate there will be some negative implications from this. But the transition is going to be complex and could take up to two years according to the EU legislation – although given the complexity at least one commentator has suggested this could extend up to ten years to properly work through the issues.
We have seen periodic bouts of volatility ever since markets bounced back from the GFC. Each one of them was coupled with stories predicting another global meltdown. One of them may well be right, eventually.
In the interim, it is important to focus on your long term plans. Unless you need to get access to funds immediately, the value of your investments doesn’t really matter on a day to day basis. I know that is easy to say from my position, but I do know how scary it can be to watch your investments going down in value, particularly as we saw back in 2007-08. But imagine how uncomfortable you would feel if you had sold out at the low point in the market back then, and your investments were still sitting 50% lower than their original value while your friends who continued to hold on saw their funds bounce right back.
If you are not comfortable with seeing your investments going down, you should look at your portfolio and review the level of risk that you are taking. Far better to take a lower level of risk and forgo some upside potential than to find out you can’t stomach the ride part way through and lock in losses from which you can’t then recover. But changes like this should be made after proper consideration, and not as a knee jerk response to a drop in the value of investment markets.
If you would like a Second Opinion on your current investments and your long term plans, please contact me.
In the interim, let me wish you the best for the start of the new financial year.
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Disclaimer: Western Pacific Financial Group Pty Ltd ABN 35 050 159 156 AFSL 224662 is a company within the IOOF group. This is general advice and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should determine whether it meets you needs or seek advice from a financial adviser. Examples are illustrative only and are subject to the assumptions and qualifications disclosed.