British voters’ surprising vote a few weeks ago to exit the European Union was a shot heard round the world—particularly by the financial markets. News of the coming “Brexit” created a swift sell-off in the United States and abroad.
But investors’ behavior over the following several days provided a fascinating clue into how short-term markets work, and it underlines why buying and selling in reaction to the Brexit news would have been a terrible idea.
In the wake of the referendum, markets absorbed two days of significant losses—the S&P 500, for instance, dipped by 5%. But within a few days, the S&P had regained just about all of its original losses. And stock markets around the globe had rallied as well.
The best thing that a serious, long-term investor could have done after the Brexit referendum was: nothing. Jumping in and out of the market in an attempt to avoid losses and snag gains typically results in the cardinal investing error of selling low and buying high. And that can create a huge drag on your investment performance over time.
But why did so many investors sell off after the referendum, and why did so many buy back in within a few short days? The answer is that simply that many investors are jittery. They’re like a flock of birds, spooked out of a tree by a strange noise, who fly a few circles overhead and then, realizing nothing is amiss, return to their branches.
That kind of behavior is fine, for birds. For investors though, it invites big losses, along with extra trading costs and, often, taxes that were easily avoidable. Better to heed the simple but powerful words of Warren Buffett: “Successful investing takes time, discipline and patience.”
If you look through market history, you’ll find that markets have regularly gone through rough times—and that they’ve always bounced back. They rebounded from the Great Depression, the Great Recession (sparked by the financial crisis of 2008-2009) and a host of wars, natural disasters, terrorist attacks and other disruptions in between. Remember the Y2K crisis?
We can be sure that there is more volatility to come, as the Brexit referendum aftermath unfolds, and as new crises arrive in the coming years and decades. As always, markets will likely have big reflexive reactions—like those birds bolting from their tree. But as they receive and digest news, markets will ultimately find their true level. And if history is any guide, they will rise over time.
Successful investing follows a funny pattern. Even the best investors usually take one step back, and two steps forward. But that’s the arrangement that serious investors must accept in order to grow their wealth. As headlines come and go, we must steadfastly maintain properly diversified portfolios in order to achieve the best balance between protecting and growing our money. So the next time scary headlines appear in the financial news, take the counsel that the British government offered to the country’s citizens during World War II: Keep Calm and Carry On.
Brian Puckett's Blog 