As we are sure you have heard, voters in the United Kingdom chose to leave the European Union on June 23rd. The initial market reaction was a very quick sell-off in stocks and increased demand (and therefore higher prices) for high quality bonds.
Some key points to consider about the United Kingdom's vote to leave the European Union:
- Nothing has actually changed at this point (except for asset prices and the attitudes of all parties involved).
- Official negotiations will not start until the United Kingdom decides to file the required notification of its intention to leave (Some speculate this may not be done until after Prime Minister David Cameron steps down in September).
- Should official negotiations start, it will be a long drawn-out process. It officially allows for a 2-year process with the option of extensions. This will involve negotiations and re-writing of many treaties, trade agreements and regulations.
- This opens the door to the possibility of many knock-on effects. Will Scotland (who voted strongly to stay in the EU) call for a vote to leave the United Kingdom? Will other EU counties call for similar votes?
Key points as this relates to your portfolio
- This will increase "headline" risk. Market movements based on negotiations or the increased/decreased chances of future votes will cause more volatility in both directions.
- Sharp market movements can present opportunities for your active managers who have a longer-term focus.
- The inevitability of unexpected events and uncertainty is the whole point of having a diversified portfolio.
- We believe the biggest detriment to an investment strategies long-term returns is not necessarily unexpected events but investors reactions to those events as a result of knee-jerk reactions.
And our final point.....As you know, we stay on top of the economic changes so that you don’t have to think about things like the "Brexit". You can get back to enjoying your summer. Rest assured, we will be monitoring these events closely. As always, don't hesitate to contact us with any questions.