Investing Sanely in an Insane World
Posted in: Investing for Retirement
Published: July 5, 2016
It was Thursday night, June 23rd. I was packed and ready to head out the next morning for the annual trip that I take with my significant other and his two boys to Rocky Point, Mexico. I glanced at my phone and saw a few Bloomberg alerts. “What?” I exclaimed out loud, as I started reading that the vote count was showing that Britain was likely to leave the EU.
My next thought was, “Now what? Do I stay up until 2 a.m. trying to write something sensible about this?”
“No,” I thought, “That action would be contrary to the way we invest, and what we teach our clients. It communicates the wrong thing.” I made the right choice by not reacting too quickly.
Here’s reality. The UK will have up to two years to negotiate a withdrawal, during which time it remains subject to EU treaties and laws. And that process won’t even start until Britain has a new prime minister. When all is said and done, the trade agreements they negotiate may be similar to what is in place today. No one knows what it will look like. (See Brexit Basics to learn more.)
My favorite tweet on the subject said, “Few predicted the Brexit market move yet EVERYONE is telling me freely what happens next… perfect.”
Isn’t that the truth.
Although various markets went down on Friday the 24th and the following Monday, one week later, on July 1, the S&P 500 was not down at all, EAFE (Europe Asia Far East) was down barely over 5% and Emerging Markets down only about 1%. This is normal market volatility. Normal.
Why, oh why is the world so insane to cause something like this to instantly change the way they invest? I mean, I get it – if you’re a hedge fund manager or the CFO of a Fortune 500 company that has to manage massive payments in various currencies. Those kinds of people have a reason to super concerned.
But for those who have equity money that they DO NOT NEED to use anytime soon? To let current events dictate how you make changes falls under my definition of insanity.
Many of the sensible finance folks out there in the world agree with me.
Mike Piper, of Oblivious Investor, said “So, to the question, “is Brexit a big deal?” the answer is a very easy “yes.” But that’s not the question that investors need to ask themselves. The question investors need to ask is whether the results of the referendum merit a change to their portfolios.”
Professor Stephen Huxley, Ph.D., Chief Investment Strategist at Asset Dedication, has a clear answer to that question.
“We are making no changes in our recommendations regarding the strategy of long-term investing that correlates with long-term planning. The equity models we utilize, based on the minimax principle, utilize data back to 1928, which includes the Great Depression, World War II, and many other international crises that make BREXIT pale in comparison in terms of global impact.”
And a famous quote from Gene Fama, the Father of Modern Finance, “We read the papers, but we don’t use them to form long-term policy.”
An investment strategy designed to provide reliable cash flow for the rest of your life should not change based on current news events. What you want is an approach that looks at broad market cycles over long periods of time. That is what we do. And we’re going to keep doing it.