The recent vote which took place in the United Kingdom last week and the non-binding result to leave the European Union (EU) has caused some swings in the marketplace and thus some investor nervousness. The outcome of the vote and the subsequent steps that will need to take place to enact an exit from the EU will take a couple of years but the short-term reaction of many was on display in the days that followed. Most investors, when confronted with major market gyrations, cannot resist the urge to take a “fight or flight” action. “Fighters” cannot resist the urge to immediately bargain hunt in the midst of market carnage, while others cannot resist the urge to take “flight” to the safety of cash and cash-like investments.
A time of extreme market volatility is never a good time to take extreme measures, whether aggressive or defensive. There is no telling exactly what long-term effect the Brexit vote will have on markets. Thus, it is best to be deliberate, and maintain a long-term focus. Here are steps to take when the urge to take immediate, extreme action arises:
· Check your liquidity position. While fleeing to cash is not advised, holding a responsible liquid reserve is sound financial practice.
· Re-Assess your risk tolerance, especially if nearing retirement. If this last episode was too emotionally taxing, you may want to consider gradually implementing a more conservative approach. Remember, it is not only your willingness to take risk that matter, but your ability to take risk as well.
· Revisit your portfolio ballast. Many people turn to gold in times of volatility. We are not major fans of gold, as it’s intrinsic value is nearly impossible to gauge. Very few things anchor a portfolio better than a plain vanilla, high-quality core bond holding.
· Avoid the temptation to speculate. Take deliberate action and always be an investor.
· Look for tax-loss opportunities. Market declines will often present opportunities to off-set taxes taken on any capital gains elsewhere in a portfolio.
Next time you feel that urge to “fight” or “take flight” remember this:
1) Yes, by waiting patiently to deploy capital in market volatility one may leave some money on the table if stocks head off to the races, but after a shock like the recent Brexit vote there is very likely to be more opportunistic dips in the near future. There will always be opportunities for the patient.
2) Fleeing for safety may provide some short-term relief, but this relief will inevitably turn to anxiety regarding when to re-enter the market.
Put simply, invest in a portfolio you will be comfortable with through any market scenario, and stick to it. Invest, don’t speculate.