Now What?Submitted by Blue Rock Wealth Management on June 24th, 2016
As you are now aware, England, in a close vote, elected to leave the EU. Since the markets in the preceding days rallied in anticipation of a “remain” vote, there has been a pretty significant sell off at this point in the trading day.
So, it is prudent to think through what this means from an economic, geopolitical, and most importantly the impact on your goals and objectives.
First, England voted to leave the EU, not the planet. The vote itself, although unexpected, really signals the potential collapse of the whole thing. There are now 27 counties in the EU, but only a little more than half are on the currency. In theory the EU sounded like a good idea but melding of 27 cultures has ultimately proven difficult. The immediate impact may mute global economic growth in an already sluggish environment.
Geopolitically this may be a drawn out, complicated process. Greenland left the EU in 1982 and it took three years to complete the transition. Best case, a clean roadmap is quickly drawn up and the transition is smooth. Worse case, the EU governments can’t find common ground and both the EU and England slide into a recession. The most likely scenario is somewhere in the middle with limited negative impact.
Markets don’t like uncertainty and clearly there is uncertainty about the EU. Add the uncertainty of the election in our country and all the other worldwide uncertainties and you have the perfect formula for volatility.
So that leads us to the most important topic; what should investors do.
Nobel Laureate and Yale economics professor Robert Schiller, who is famous in financial circles for Schiller P/E ratios and papers about economic bubbles, was recently featured on the topic of fear called, “Mind over Money”. He stated, “fear is perfectly rational, and fear is what keeps us alive.”
If you are in the jungle and you hear something loud and scary, fear tells you to turn and run. Fear in this case is perfectly rational and it may save your life.
When financial markets are volatile we are quick to say they are acting irrationally. Being concerned about market volatility is perfectly rational for investors because it involves your savings, often accumulated over many years. Watching daily or monthly movements instills an emotional reaction. Running out of money is a perfectly rational fear. What is important is your response to that fear is equally rational.
We need to have rational responses to market volatility. Has the volatility created opportunity? Has the volatility changed our allocation? The rational answer is review and reallocate. The irrational answer is to sell everything and put the money under the mattress.
We can’t control what happens in the markets, with interest rates or global events. Having an emotional reaction to these events is perfectly rational. Part of our job is to help create a rational response.
If your goals and objectives haven’t changed, your plan shouldn’t change.
If you have concerns, give us a call. That is why we are here.