Yesterday, June 23 2016, citizens in the United Kingdom voted to exit the European Union (EU). This is a historic event.
The EU was initially founded in 1951 between Germany and France, on the heels of WWII, to foster unity on a continent devastated by war. Belgium, France, West Germany, Italy, Luxembourg and the Netherlands subsequently joined. Over the next 4 decades the EU expanded to 28 countries. The European Union was established under its current name in 1993 following the Maastricht Treaty. Virtually every country in Europe, except Norway and Switzerland, are members.
While the UK vote to exit is a historic event that will have far reaching political / financial / economic effects, it is not likely to create a collapse in the global financial system like Lehman Brothers did in 2008. The checks and balances implemented in the banking, financial, and corporate world after the 2008/2009 financial crisis should buffer the impact of this decision by Britain. We must keep in mind that just because the referendum has passed it does not mean that the U.K.’s exit from the EU is effective immediately. In reality, the process is expected to take at least two years, giving the U.K. and the European Union time to adjust to this unprecedented change.
We are seeing a sharp, negative reaction to the decision in the global financial markets today. I believe that is the shock factor more than a long-term financial and economic impact beyond the UK. I believe the uncertainty caused by this decision and the short-term spike in volatility may actually create opportunities in the days & weeks ahead. As Warren Buffett says, “be fearful when people are greedy and be greedy when people are fearful”.
One of the most important things I do is manage emotions when it comes to investments. Another important factor is diversification, as this mitigates the impact of events like this vote. While stocks are falling today, bonds are rising as they are considered safer investments. The accounts I manage for you are divided roughly evenly between equities and bonds. This event will inevitably have a short-term negative impact on your portfolio results but I remain confident that we are appropriately positioned to meet your investment objectives.
Please feel free to contact me if you have any questions or concerns.