Over-Reaction to Geopolitical Events Could be a Mistake

July 12, 2016

In the increasingly-globalized world we all live in, it’s an unusual week where there isn’t one or more noteworthy events that occur which has the implication of being a “game-changer” in the financial world.  Much of the time, the so-called meaning and implication by the incident(s) end up being sensationalized by various media outlets and some investors are prone to making wholesale changes to their portfolios in response to whatever pending disaster might await them if they don’t act soon.

Such was the case with the citizens of the United Kingdom voted to leave the European Union late last month.  While those who voted to “leave” celebrated (for the most part), global financial markets reacted with far less glee and indices, including those in the US, fell sharply the next day as investors sold holdings in anticipation of negative repercussions.

In short, most investors sold out of fear and uncertainty.   As it turned out over the final week of June, the ensuing reaction and recovery of markets to the “Brexit” was a perfect example of investor over-reaction, albeit to a significant geopolitical event.  While the emotional response is understandable, it’s not sensible, especially to the average investor thinking about their IRA or 401k account.  Before instructing their advisor or account custodian to sell their investments, such investors might want to take a moment and consider the basis for their decision before executing it.

Consider this: within the 401k or the IRA are likely investments such as stocks, bonds, and/or exchange-traded funds (ETF’s) and mutual funds containing stocks, bonds and other such securities.  Hopefully, these investments were purchased and managed with a diversified investment plan in place that considered the investor’s risk tolerance, time horizon, investment experience and their near and long-term objectives.  With the vote that just occurred not more than 24-48 hours prior to their decision, these investors were, in effect, tossing out their investment game plan without truly understanding whatsoever why or how the actual process of the UK disengaging its economy from the EU would affect their individual stock/bond holdings or the likely many hundreds of holdings within their ETF’s and mutual funds.

It’s funny (but also sad).  Despite the thousands of articles and millions of conversations investors have had with advisors about not making rash decisions with money, that primordial area of the human mind seems to dominate the rational part and causes people to react rather than think things through and be patient.  And, as many times before, those that panicked were probably dismayed at watching the currents reverse after two days and the buying majority sent the indices back up, leaving those who sold likely regretting their choice, (and now having to decide when/if to buy back in, perhaps at higher prices than when they sold).

The lesson here is, once again, not to react, especially initially, to macro events or the news-du-jour.  Uncertainty is a constant in financial markets; get used to it. As many successful and noteworthy investors have declared, make it your friend, not your foe.  If you let the market’s actions and reactions dominate your decisions, you may well end up frustrated and disappointed in the end.