Keeping an Eye on the Horizon
The market shock of Brexit underscores the importance of staying invested.
By Richard Kalfayan Jr.
In times of crisis, it’s crucial to maintain a steady hand. There is no better illustration of this than the shock to the system of the UK’s vote to leave the European Union. On June 23, voters cast ballots in an advisory referendum on whether to exit the EU after 43 years of membership, otherwise known as “Brexit.” With voter turnout of 72 percent, the vote was 52 percent to 48 percent in support of leaving, which threw the region into uncertainty and global markets into disarray. The immediate aftermath was pandemonium. The British Prime Minister announced his resignation, the S&P Global Broad Market Index lost $2.1 trillion in one day, and the pound fell to a 30-year low against the dollar.
All around the world, anxious experts were trotted out and anxious investors wrestled with the fundamental question that emerges in the wake of such market shocks: Should I sell?
It’s at moments like this that a calm, clear-eyed view of your long-term financial goals is crucial, and can help you to avoid panic and have the confidence and fortitude to stay invested. Which brings up some important questions:
• Have you spoken with your financial adviser about your goals? What is your timeline?
• When will you need to access your funds…in five years, 10 years, 20?
• Is your portfolio designed to take on higher risk for higher reward, or focused on a more defensive position?
• Have you talked to your advisor about the level of overall risk you’re comfortable taking?
Knowing the answers to these questions can change the way you view and respond to volatility. Short-term losses are uncomfortable for everyone, but knowing that your own investment horizon is 20 years away and that your investments are built to generate income and designed to be low-risk can help take the worry out of a white-knuckle day in the markets. You can be comfortable knowing that your portfolio has time to recover and a solid, low-risk framework in which to do it.
Investors and investment strategies should aim to be cognizant and sensitive to global events, and nimble enough to respond to them. But more importantly, they should strive to have a longer-term view and a plan to manage around cyclical events, not to block and tackle for every surprise downturn. No one—no matter how informed or how dedicated—can predict the future. However, a thoughtful advisor can help you to benefit from, and protect assets over the period of, multiple market cycles, regardless of day-to-day downturns.
And there’s another crucial reason to stay invested: You can lose when you don’t. From 2001 to 2015, an initial investment of $10,000 in the MSCI All Country World Index almost doubled if it remained fully invested throughout the period. But missing just the 20 best days for the index during that 15-year period gave you a negative return, while missing the 40 best days more than halved the original $10,000. Without a plan and the confidence to ride out market volatility, investors are running the very real risk of losing out on significant long-term gains.
In the case of Brexit, once the initial shockwave of the referendum passed, global markets enjoyed a rapid recovery. The Dow Jones Industrial Index and the S&P 500 both climbed in the week following the vote, recovering more than half the losses suffered in the immediate wake of the “leave” referendum. Even the UK’s FTSE 100 share index rallied.
It can be incredibly challenging during seemingly disastrous financial events to stay calm as you watch stocks plummet and yields drop, but staying the course is essential to your long-term financial success. So stay calm and take a deep breath. If you have a long-term plan that feels right and an asset allocation that is appropriate for your goals, that’s what rules the day. You may have to ride out the short-term shocks, but you can do so with confidence that your portfolio is built to stand the test of time.
Editor’s Note: Richard Kalfayan is the Managing Director and Global Investment Specialist, J.P. Morgan Private Bank, New Jersey. This article is intended for informational purposes only; it is not intended as an offer for any specific product or service. The article contains the views of a J.P. Morgan employee, which may differ from the views of J.P. Morgan Chase & Co., its affiliates and employees. The views and strategies described may not be appropriate for everyone. Certain information was obtained from sources we believe are reliable, but we cannot verify the accuracy of the content and we accept no responsibility for any direct or consequential losses arising from its use. For specific guidance on how this information should be applied to your situation, you should consult a qualified professional.