The Investment Scientist

Brexit: What to Do About It?

Posted on: June 17, 2016

Brexit.jpg

A week from now, there will be a referendum in Great Britain to determine if the UK should stay in EU or should leave for good.

A mere month ago, the stay vote still won by a comfortable margin. Just showing how political wind can shift, the odds are now 50/50 that the leave vote might win.

Here are some consequences I believe a leave vote would entail:

  1. Copycat referendums in other EU states, and within a few years, EU might not exist.
  2. London’s reputation as world financial capital on par with New York may be diminished.
  3. Disruptions to trades and investments, since UK’s relationship with Europe and the rest of the world, will have to be renegotiated.
  4. Pound Sterling, London stocks, and property prices might go south. Potential capital flights from the UK.
  5. More volatility in global stock markets.

As an investor, what should you do about it?

Well, all of the above can be called informed speculations. They are not actionable
intelligence. In other words, when it comes to investment, we should never base our decisions on speculation about future events.

There is a mountain of academic evidence that the more investors react to events, the less the returns they get from stock markets. If you don’t believe me, go read “Trading is Hazardous to Your Wealth”, by Berkeley professor Terry Odean, published in Journal of Finance in April 2000.

I know it’s the reverse of a popular belief, but I will follow this mantra “Don’t just do something, sit there!

If it should come to pass that the market drops significantly following the Brexit vote, then we rebalance and pick up shares cheap! Who doesn’t like a big discount?!

PS: As I was finishing up this article, news broke that a pro-stay MP was shot and killed by a pro-leave fanatic. The murder has the potential of shifting the political wind again!

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

 

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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