So the ‘Brexit’ vote happened. The markets weren’t expecting it, and they are about to show their disappointment. Big picture, the actual leaving of the EU might be a good thing for Britain, but to a US based investor, that doesn’t mean much.
Markets are driven by speculation, and people and organizations are able to move them much more than the average investor might believe. The Brexit event is a prime example of a known event day that has one of two outcomes, but with a stacked result. In other words, it was a bad bet for investors.
If you look at the upwards price movement since June 15th, the majority of this came from Brexit voting speculation. In other words, the market is reflecting a ‘stay’ vote.
If the stay had occurred, since most movement had already occurred, we would likely have seen a small, final sigh of relief, with a nominal increase or decrease in value. However, since the vote was a negative, all the speculative play has been reversed, and we are anticipating a 2-3% decline today.
Again, from Big Picture, Little Picture perspective we can encounter momentum investors, as found within a smart beta strategy as an accelerator to decline. You can think of it as stocks wiping off their recent gains, and then people chasing trends adding fuel to that fire. Being an efficient market though, this will be tempered by those getting in at lower prices, either through automated rebalancing, or simply cherry picking ‘cheap’ positions.
What to do?
As ever, it is time to reflect. Does your allocation expose you too much to the speculation of the market? Should you take a little less, or more risk? I would especially focus on those who started investing around 6 years ago, with a long term time horizon. It might be time to change from ‘I can take on risk because my horizon is so far away’. To something a little more goal orientated, where the level of risk of assets is the minimum required to achieve what you want from life.
Today could also be a day for tax loss harvesting and for rebalancing. Take a look at things, and feel free to reach out to me with questions or ideas.
While the future of a harmonious Europe has changed, I’m sure that it will all work itself out, as will the market, but remember to consider how much you are at the mercy of external forces, and keep things under control.