A Quick Brexplanation

By Sam Swift, CFA, CFP®
I was thinking about the vote on whether or not Britain would leave the EU last night and decided to write down some predictions. You may notice a few similarities.

If Britain votes to stay in the EU:

There will likely be some market volatility. It could be significantly up or down or both in the same day. This is the result of short-term speculators attempting (and likely failing) to make a profit off an unprecedented event. No need to worry. This event is one of many that a long-term investor will experience over time and they are all essentially irrelevant to your plan. As part of a long-term plan, those that need money in the shorter-term should have a good amount of less volatile assets to cover their needs.

If Britain votes to leave the EU:
There will likely be some market volatility. It could be significantly up or down or both in the same day. That is the result of short-term speculators attempting (and likely failing) to make a profit off an unprecedented event. No need to worry. This event is one of many that a long-term investor will experience over time and they are all essentially irrelevant to your plan. As part of a long-term plan, those that need money in the shorter-term should have a good amount of less volatile assets to cover their needs.

In fact, feel free to sub in that “prediction” for any future event.

Of course, knowing how the vote turned out this morning, Brexit will have significant impacts across the world and my intent is not to discount those. To be clear, the actual mechanics of this will happen over the course of two years in which a negotiation will take place between the EU and Britain. That countdown clock is unlikely to be triggered until a new prime minister has replaced David Cameron, so there is plenty of time for the details to be hashed out. I would also caution you to be skeptical of any claims that this will be wonderful or terrible for Britain and/or the EU. This is an unprecedented development and the truth is that no one knows for sure how severe the ramifications will be one way or the other.

The point here, though, is to highlight the objectivity we must have as investors. As citizens of the world, we are free to discuss and argue about what this may mean, but don’t let that emotion creep into your investment strategy. Brexit is the current face of the short-term risk we take on when investing in equities in order to get paid in long-term returns. In the past it’s been Y2K, 9/11, Enron, the housing bubble, Greece, China, Syria, and on and on and on. We don’t know what exactly the future risks will be, but we know they will be there. As a long-term investor, you don’t want to get caught reacting to the crisis du jour. All you need to know is that short-term volatility–no matter the cause–is the price we pay for the tremendous power of long-term growth. This too shall pass.

Brexit

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