I’m sure you’ve heard by now that last Thursday the citizens of the United Kingdom voted to leave the European Union (52% voted to leave, 48% voted to stay). The European Union (EU) is a political and economic partnership of 28 countries, mainly in Europe.
The EU was formed after World War II to facilitate peace and free trade throughout the region, but many of the countries involved were accepted into the EU much later – even as late as 2013 in the case of Croatia. The popular nickname “Brexit” was derived from a combination of “Britain” and “Exit.”
The UK’s withdrawal from the EU will not happen overnight, but could take up to two years to negotiate. No one knows what the economic impact on Britain, Europe, or the rest of the world will be. Some predict this is a recipe for global recession, and others claim it’s the best global economic news we’ve heard in a while.
In the meantime, it’s hard to ignore headlines about the impact on the markets, such as the following:
CNBC: Dow closes down 600 after Brexit surprise; financials post worst day since 2011
USA Today: US stocks hammered as Brexit shock rocks markets
New York Times: Turbulence and uncertainty for the market after Brexit
It’s true, that Friday and so far today have been bad days for the stock market, both in the USA and abroad. The Dow Jones and S&P 500 indexes were down over 3%on Friday. So what does this mean for investors?
Some reporters, politicians, and economists would have us believe it’s time to run for the hills because nothing like this has ever happened before. While this may be the first time a nation has left the European Union since its formation, this is not the first time a change in the political landscape has affected global markets.
The truth is that markets go up and down all the time in reaction to big news that has never happened before – sometimes better than expected outcomes, sometimes worse than expected. In that sense it’s always the same. Uncertainty is inevitable.
No one knows which direction the next 20% move will be, but historically the next 100% move has always been up. Savvy investors who maintain discipline through the ups and downs of the market tend to be handsomely rewarded in the long run in spite of short-term volatility – or to be more accurate, because of short-term volatility.
On October 19, 1987, the S&P 500 dropped over 20% in a single day. It took about a year to recover from that huge single-day loss, but eventually those who maintained their positions were able to regain what they had lost. Only five years later, the S&P 500 was up over 120% from the low, and 20 years later it was up 983%. How much do you think investors earned over that same period who cashed out after that fateful 20% drop and vowed they would never be hurt by the market again?
During times like this it’s critical to stay focused on your long-term goals. Today won’t be the last time we see a drop of more than 3% in the market. As long as you maintain a disciplined approach and stick to your strategy, short-term losses will be long-forgotten and will have very little if any impact on your overall success.
If you have questions about how any of this affects you personally, we would be happy to chat with you about it. Just call our office at 702-433-7588.