The world is now fully aware that the United Kingdom has voted to leave the European Union. Capital markets have responded negatively on the whole to the “Brexit,” and reactive sentiment, pro and con, has been dramatic.
The British have never fully integrated into the EU and have always maintained their own currency, the British Pound. But a majority of voters want even more control, and as stewards of the fifth largest economy in the world, the British are perfectly capable of sustaining an independent existence—as they did for more than a millennium prior to joining the EU in 1973. It remains to be seen if London will retain its preeminence as the financial center of Europe.
The Brexit calls into question the value of the EU to other member countries. At BIP we have repeatedly questioned the long-term value of an arrangement that robs individual countries of their economic independence through a common currency. We continue to believe that Greece will one day be forced to leave the EU in order to deflate its currency and increase exports. These additional issues and risks contribute to our rationale to underweight foreign equities in comparison to the global indexes. And it is why our allocation to fixed income is almost purely in U.S. dollar-based instruments.
While volatility is an integral part of investing, it’s not always comfortable. If you’re operating under a well-crafted financial plan, general scenarios that give rise to portfolio volatility should already be factored into your financial projections. With buying low and selling high remaining the central tenet of investing success, fear created by the media can vastly overstate real risks and cause some investors to sell at inopportune times. Sticking to your financial plan and investment strategy that were created for situations like these is crucial.
While the Brexit presents some interesting issues around how the Eurozone economy will perform in the future, especially if it becomes a catalyst for additional EU defections, it does not alter the fundamentals of investing that should guide your investment portfolio through the current European squall, and beyond. The markets have weathered far worse storms and will continue to do so.