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Brexit and the importance of a diversified portfolio

July 1, 2016 - Stocks
Brexit and the importance of a diversified portfolio

It’s a historic time for residents of the United Kingdom who voted last week to leave the European Union. Over a hotly debated issue, it appeared the voters would opt to remain as part of the EU but the final results said otherwise.

The immediate results of Brexit included the resignation of Prime Minister David Cameron as well as significant volatility in the financial markets. Interest rates on U.S. Treasury bonds are close to historic lows (under 1.5% for 10-year notes) as investors evaluate the impact the UK (with a market capitalization of 6%) will have on the global economy.BREXIT-1

As we’ve written and said many times, markets hate uncertainty which leads to all kinds of ups and downs. Since the UK has never left the EU before, no one (which includes you, me, and all the pundits on TV) knows for sure what the overall impact will be. Events like this should not be taken lightly, but prognostication is poor substitute for diversification, especially in periods of uncertainty.

Our sense is that we’ll see increased ups and downs in the stock market as investors try to discern what comes next. It will take time for companies to adjust and new trade agreements to be written. Longer term, it will be interesting to see what happens with the rest of Europe as other countries weigh their options and confront their own issues. U.S. companies are also affected since we’re all part of the global economy and rely on each other to buy goods and services. And the Federal Reserve will continue to monitor and evaluate interest rates.

While day-traders and short-term investors should be concerned with the upcoming volatility, long-term investors should continue to rely on their investment plan. An appropriate long-term strategy is centered on the expectation that events like this will periodically occur. And for that exact reason, we hold a significant portion of your investments in short-term, high quality bonds. As such, we’ll continue to adhere to our time-proven strategy for investing client portfolios. Relying on diversification, appropriate levels of risk, and a disciplined process, we’re confident that you and all of our other clients will survive.

For those clients taking withdrawals, we’ve already set aside a significant amount of money outside of stocks (the decrease in interest rates on bonds actually pushes up the value of your existing bond holdings). Clients who are still contributing may get a chance to buy more shares of companies at a discounted price. Either way, we’re prepared for today’s crisis as well as the next one.

Don’t hesitate to contact us if you have any questions.

This article, Brexit and the importance of a diversified portfolio, first appeared on Financial Service Group.