Last night’s stunning news of Britain leaving the E.U. is causing turmoil in the global financial markets this morning. The following topics may be useful in communicating this unprecedented event with clients.
1: Global Risk Is Often Unquantifiable
To say this was a surprise is an understatement. It underscores the ability of a low-growth environment to foster dissension, especially when classes are benefitting unequally (Sound familiar?). I would expect Brexit to energize Mr. Trump’s campaign, which will add more uncertainty in an already unstable political landscape. And there likely won’t be a cathartic end to the Brexit vote, as the U.K. has two years to negotiate its exit. The likely result is a return of market volatility for the foreseeable future. Under that scenario, increasing client communication is crucial.
2: Diversification Worked (Again)
We won’t likely hear many stories of investors timing their way out of today’s carnage (although there are always a few). Fortunately, it doesn’t take a market wizard to see that most hedges are doing their job today. Gold is up big among all the uncertainty. Fixed income is soaring, with the mindset that any sort of rate hike is off the table. And managed futures, which profits by utilizing a momentum approach in the global currency, equity, bond and commodity markets, is having a stellar day.
As I have said many times, the biggest job of an advisor is to keep their clients invested through tough times. I can’t think of a better way to accomplish this task than by utilizing a well-diversified portfolio.
3: Look for Opportunities After the Carnage
Markets tend to overreact to news, which causes them to rally unexpectedly as they adjust closer to fair value. Rebalancing over time into volatile assets that have dropped precipitously is an excellent way to add value without having to rely on one’s skills as a prognosticator.
And watch valuation ratios in European equities – at some point, there will be a buying opportunity in that beaten-down part of the world.
(Check out all of ThinkAdvisor’s news and analysis on Brexit.)
See Think Market Indicators Are Shouting Bear? Think Again: Searching for Alpha for June 2016 all of Ben Warwick’s additional market and investing analysis articles.