The unexpected happened. Again. This time it was the Brexit vote.
The reality is that “unexpected” events happen. They can occur at least annually and sometimes a few times in a year. And sometimes, as in this case, the financial markets can also unexpectedly quickly rebound.
The reality is that the future is uncertain. Uncertainty means that there will be events which cause sharp movements in the financial markets. An unexpected event can be positive or negative. We recognize that the most worrisome and disconcerting unexpected events are those which cause a fast and broad downturn in stocks. However, these “unexpected” types of events are really normal and should be expected.
Your goals and the Brexit aftermath
We focus on long-term investing, so that our clients can have a greater sense of financial security for themselves and their family. We work with you to understand your objectives, which usually include college savings, retirement planning and ensuring a financially secure future for your family and future generations.
While global stock markets have been volatile during the last week, being well diversified has meant that the Brexit aftermath has not had a significant financial impact on your lifestyle or your ability to reach your financial goals. This is what you should be focusing on.
While the Brexit vote caused declines in US and global stocks last Friday and this Monday, a slightly broader perspective is needed. Most global markets increased during the week leading up to the Brexit vote, so the immediate reactive declines on Friday and Monday were partially just erasing the increases which had just occurred in the preceding days.
After Monday, global stocks markets have rallied, so a large portion of the losses that were incurred on Friday and Monday have already been recouped. As of Wednesday’s close, most US and global asset classes were slightly down for the month and the 2nd quarter, but the losses are in low single digit percentages.
Is our investment philosophy beneficial, in light of “unexpected” events?
We know that unexpected things will occur in the future and these events often cause major stock and interest rate movements. Having a broadly diversified global portfolio is very beneficial to you, especially in terms of “unexpected” events. If we don’t know what the future will bring, the more that you are diversified, the better off you will be, as contrasted with a concentrated portfolio that could be severely damaged by an isolated event. By being well diversified, we are pro-actively helping to prevent a large financial mistake, which could have a long-term impact on your financial well-being.
For example, if you worked with an advisor who made industry or geographic bets (predictions), these can pay off or be huge disasters. If your advisor thought energy prices were going to increase over the past two years, and had increased your allocation in oil and commodity stocks, you would have been severely hurt. If an advisor thought the Brexit vote was going to be “Remain,” and loaded up on UK financial stocks, you would have incurred 1/3 losses in the two days after the Brexit vote in a number of top UK financial institutions and banks.
This does not mean that diversification can prevent losses, which it does not. It means that being well diversified gives you the best chance to be financially successful over the long-term. Since the future is always unknown, being broadly diversified mitigates the unnecessary risk of being concentrated in one market sector, geographic region or a handful of stocks.
The Brexit vote is a perfect example of why we do not make investment decisions based on predictions or forecasting the future.
* At the beginning of the year, with the 10 year US Treasury Note yielding 2.25%, Goldman Sachs predicted the yield would be 3% by December, 2016.
* During this winter, Goldman changed their prediction to 2.75%.
* A month ago, Goldman again revised their forecast down to 2.4% by December, 2016.
* On Monday, they again changed their forecast for the yield to be 2% by year-end.
* The 10 year US Treasury bill is currently yielding around 1.5%.
What investment philosophy and strategy are in your best long-term financial interest?