By: Devan Robinson
"The four most dangerous words in investing are 'this time it's different.'"
- Sir John Templeton
I just wanted to send out some quick thoughts on the “Brexit” vote in the news today. There is clearly a lot of fear in the market, and I wanted to provide you with some context as you navigate the news this weekend.
What is the “Brexit?”
Voters in the U.K. have voted to leave the European Union. Contrary to nearly all of the polling and predictions by the media the vote ended in favor of leaving. In my view, this was an incredibly poor decision by the voters and will have long-term repercussions for the U.K. for decades to come. The estimates of the economic impact of leaving leading into the vote were virtually all negative for the economy of the U.K. (source). Why is that the case? Leaving the E.U. will only make trade more difficult, labor less mobile, and goods and services costlier for their citizens. As a close observer of macroeconomics it is very rare to see this much consensus from economists on anything!
How does this impact my portfolio?
I believe that the impact of “Brexit” on your investment portfolio will be minimal (assuming you are not a U.K. citizen!). The true turmoil and consequence of the "Brexit" will mainly fall on the citizens of the U.K. Here is some perspective on the issue as you head into your weekend:
- At the time that I am writing this e-mail, the S&P 500 is down 0.34% for the week. While today’s 350+ point down move for the DJIA is significant, when you wrap context around it your perspective changes.
- The U.K. is less than 4% of global GDP. Even in a worst case scenario the country is not nearly large enough to derail anything except itself.
- Earlier this year I downplayed the impact of China’s slowdown (which was a very contrarian viewpoint, and I was proven correct) and I would downplay the impact of “Brexit” much more. China is four times larger than the U.K. and their impact on global markets has been modest.
- Implementation will take years of work. The renegotiation of trade-deals and the actual exit from the E.U. is projected to take years and mountains of red-tape. This will be a slow going process as the U.K.’s lawmakers prepare for exit.
- While the U.K. was a member of the European Union they were not a member of the Euro-Currency. The U.K. currently has its own currency, the British Pound, which makes their decision much less significant compared to 2012’s “Grexit” of Greece.
If you are invested in a low-cost, well-diversified global portfolio with the right amount of risk – the “Brexit” drama doesn’t impact your long-term financial plan. In my view the “Brexit” vote is simply the fear of the month. I predict that we will have to find something new to scare us in the coming months as this blows over.
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