Brexit! This is not a drill!
The klaxon horns have sounded, and it’s all hands on deck! The British “leave” vote — Brexit in financial medialand speak — has forced us all once again to rouse ourselves from our media-induced slumber and get busy getting busy. Pull on your big-boy pants, and sell this, buy that! Hedge, hedge, hedge!
It is my never-ending charge to remind you (once again) that the time to read the card on the seat back in front of you is before the plane takes off. At 30,000 feet, with the engines catching fire, you will most likely have missed the opportunity to think calmly and clearly about your best options.
This is why we plan ahead for events such as Brexit.
I know, I repeat myself, seemingly every other quarter, as we run through this muster drill. Something bad happens somewhere, and markets are unhinged. A substantial sell-off ensues, and all of the usual suspects panic. Once the noise subsides and the markets settle down, everyone wonders what the heck just happened.
My phone in the office rings, as reporters want a comment on the sudden surge in volatility. Not one of them likes my standard response: “This is what markets do. They go up and down, on occasion, violently.”
The data shows that markets have on average swung 2 percent up or down once every 11 days since the year 2000. Those of you who may have been paying attention to this detail should not have been surprised by the great volatility markets saw last week — first to the upside as wishful thinking led traders to believe that Brexit was a non-starter, then down and down and down as the votes came in for leaving. By week’s end, it was a bloodbath: European bourses fell 4 to 6 percent; British banks dropped 20 percent or more; U.S. equities fell 3 to 4 percent.
The polls suggested this vote was going to be close; wishful thinking led people to assume a better outcome. You’ll be shocked to know that British stocks were actually up for the week — that’s how robust their rally was ahead of the vote.
Now we get to hear all of the after-the-fact explanations, reasonable-sounding narratives that play right into your hindsight bias. It is always after the fact that these neat little stories appear. Yet somehow, their authors failed to foresee what was so obviously “going to be” ahead of time.
That is why you should distrust them all, the nonsensical rear-view-mirror rationalizations that they are.
I keep a short list handy to remind myself of all the things investors must remember when these sorts of macro events cause turmoil:
●Markets surge and sell off. This is the ordinary course of events.
●The future is inherently unknown and unknowable. Those who claim otherwise are trying to sell you something.
●What sounds sexy and looks good in a brochure is not what usually makes you money over the long run.
●The gurus and talking heads have failed you. Once again, their forecasts were wrong. They were selling you a product, not providing any insight.
●Emotional reactions are bad for your portfolios.
●“Nobody knows anything.” The William Goldman quote, written about Hollywood, applies to just about everything in life. Get used to it.
●You need a plan. EOM.
●Your brain has evolved to adapt to keep you alive in changing conditions, not to make risk/reward decisions.
●The world is filled with random outcomes. Even more so when people are involved.
●Boring, steady portfolios can withstand about anything you throw at them.
●“Uncertainty” is a misnomer. The future is always unknown and always uncertain. When you hear people using the word “uncertainty,” it is because they are scared enough to briefly acknowledge their own ignorance.
●Adrenaline, it turns out, is not the basis of sound portfolio management.
●That plan mentioned above? You must have discipline to stay with it.
●Bull and bear markets have their own timelines. They do not care about your retirement, your saving for your kid’s college or the new house you want to buy.
●Investing is hard.
●Sometimes, Brexit happens.
If you learn nothing else, at least think about this: It is easy to confuse day-to-day noise with actual and significant signals. If you are merely reacting to the latest market action, then what you have is not a plan — you have an instinctual, fear-driven reaction, and it’s the makings of a disaster.