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Brexit, After a Breath


Volatility is never fun while it’s happening. But financial advisors get paid to remain dispassionate in the face of market turmoil and to help their clients do the same.

The fallout from the unanticipated Brexit vote result led to a lot of downward market action Friday last week and Monday this week. We suspect a big reason for this is the fact that, while the vote was predicted to be close, “stay” was expected to carry the day. Thus, the surprise news of a “leave” win brought with it what was almost certainly emotion-driven selling in the markets. The markets don’t like surprises or uncertainties.

While Germany appears to want to force an accelerated exit, the Brexit transition process is slated to take up to two years. The tumult in the markets, then, reflected the attempt to price the impact of a heretofore unexplored process at a time when emotion was a driving force.

After two days of losses, anxiety eased and things began to rebound. Perhaps as the result of strong gains in global markets, the Dow Jones Industrial Average experienced triple digit gains on Tuesday and Wednesday. As this article goes to print, it seems the Dow Jones is on track to do so again today. It remains to be seen whether there will be aftershocks, and if so, how significant they might be, as the process around Brexit unfolds.

International stocks are, and will continue to remain, a significant part in our clients’ portfolios. The primary reason for this is diversification: stocks around the world do not move entirely in sync, so a portfolio that diversifies worldwide should, in the long term, have less volatility than one invested exclusively in domestic stocks. Furthermore, even before the “leave” vote, we saw foreign stock valuations as very attractive relative to their U.S. counterparts. If we wish to “buy low” and “sell high,” we think international stock funds are a potential source of opportunity.

Our strategy is built to withstand the inevitable volatility of the markets, and even if we had a crystal ball that allowed us to know the outcome of the Brexit vote ahead of time we would not have changed course.

Our investment strategy does not focus on single-country, or even regional, allocations. Our exposure to UK equities represents only a small portion of our overall allocation.  And not all UK stocks will face the same impact: the fall in the pound relative to other currencies helps those companies that are export-based, as their goods are relatively cheaper.

Furthermore, the two largest international positions in many of our portfolios (IVA International Fund and Tweedy Browne Global Value II) generally invest in high-quality, multinational companies.  Thus, whatever the short-term effect on prices, we have exposure to strong companies based, and doing business, throughout the world.

Finally, our investment strategy allocates across a variety of assets instead of individual securities.  As a result, we own very small portions of a very large number of companies, a strategy that spreads risk broadly rather than narrowly.

In conclusion, no one can forecast how economic events will cause markets to react. Our strategy is built to withstand the inevitable volatility of the markets, and even if we had a crystal ball that allowed us to know the outcome of the Brexit vote ahead of time we would not have changed course. While we do look for buying opportunities in times of uncertainty, we know that it is unwise to alter long-term asset allocations and investment strategies on a reactionary basis. That can only do more harm than good.

By Thomas A. Rylko, CFP® / Financial Advisor

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