Many of the worst investment mistakes I’ve seen have originated from an overreaction to the unknown. We have all witnessed substantial global upheaval in the past. Many of us have had a window seat to watch how Wall Street responds to uncertainty and turmoil. The financial markets don’t like uncertainty. Why? Because it’s extremely difficult to try to predict the future.
For instance, what will happen to all of the trade deals that are in place? What impact would this have on corporate profits? What about the bond markets, or the debt that is tied to the European Central Bank? Long term, will other EU countries follow Britain’s example? The list of questions goes on and on.
Far too many money managers placed huge bets on Brits staying within the EU. They all have egg on their faces. Now there is a rush to exit these positions causing market volatility. Their repositioning responses will not been good for your portfolio.
It has always been my philosophy that slow and steady wins the day. So what should you be doing to protect your life savings from the Brexit vote to leave? Actually, you probably shouldn’t be doing much at all. If you are properly diversified with limited exposure to any one country, you should probably sit tight for now.
Here is a four-point strategy to help investors:
- Don’t react by selling anything. To be sure, there will be some fear in the European markets, but this would not be a good time to react to that fear. This is an emotional component of behavioral finance, and history has shown that those investors who sell in the midst of a crisis usually end up doing so at the wrong time. They wind up selling low and buying high.
- Look for buying opportunities. The best time to purchase things on sale is when nobody else wants them. There may be some tremendous opportunities to purchase distressed assets, because many investors have given into fear and are running scared.
- Analyze how much of your portfolio is at risk. Most investors don’t have all of their portfolio in risky assets. Figure out how much of your portfolio is actually tied to risky areas and how much is reasonably safe. Odds are, if you are a well-diversified investor, you don’t have a high percentage of your portfolio tied to the European financial markets.
- Relax! We’ve experienced changes before, and sure enough, we will see more changes in the future. Most cannot be predicted. While changes of this magnitude can be worrisome, I urge you to fight through your fear.
Simply put, a well-diversified portfolio should protect you from most of the worst aspects of any volatility we may experience.