Brexit: Guidance from Seasoned Financial Planners

Brexit: Guidance from Seasoned Financial Planners

On June 24th 2016, the Dow Jones fell more than 600 points and the S&P dropped more than 58 points after the United Kingdom voted to leave the European Union.

On the Wrong Side of a Big Bet

Everyone—Las Vegas bookies, the media, and the market as a whole—got it wrong regarding Britain’s referendum to leave the European Union. The agreed-upon probability of the U.K. remaining in the E.U. drifted between 80-90% in the days leading up to the vote, and markets surged on June 23rd before the polls closed. As the numbers came in throughout Friday night, and the “Leave” camp built a commanding lead, market futures plummeted. By Friday, more than a few investors found themselves on the wrong side of a big bet.

What to Expect

We have already seen extreme uncertainty across global markets, but the prediction that Brexit is the signal for an imminent global recession is premature at best. For one thing, the process of disentangling the United Kingdom’s economy from that of the EU will take at least two years, and therefore the real effects of Brexit on financial markets won’t be known for some time. This isn’t to say that the situation isn’t serious. Brexit could encourage other EU members to leave the union, creating further instability. Europe could head into a recession and drag U.S. markets along for the ride. But for the moment, this is mere speculation.

Historical Perspective

In July 1990, Iraq invaded Kuwait and caused oil prices to spike rapidly. The Dow dropped 18% in three months, and the economy went into an 8-month recession. Yet in less than a year, the Dow had regained all its losses. Within two years it surpassed the previous high set in 1965, and since then—despite the burst of the Dot-com Bubble, the subprime mortgage crisis, and the Great Recession—the Dow Jones Industrial average has more than doubled. A case in point? When the Dot-com Bubble burst, Amazon stock dropped from $107 to $7 a share. On Friday June 24th, it was down around 3%, closing at $698.96.

Time-Tested Wisdom

The key takeaway from Brexit is this: in more than 100 years of market history, markets have always rebounded. Crashes and recessions are guaranteed, but so are recoveries. In this never-ending cycle of ups and downs, investors that lack the guidance of experienced financial planners typically invest when the market is high and pull all their money out when the market drops. Financial planners are never more valuable than during times of extreme volatility, because they help their clients avoid emotional investing, react appropriately to market conditions, and maintain a strategy designed to meet long-term financial goals.

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