A friend (and client) wrote me recently, “thank you for not emailing me about Brexit.”
The week of the vote, he said he received at least a dozen emails from other financial firms with Brexit analysis.
The impact of Brexit was far less severe than the market pundits would have had you think at the time.
Yes, the Brexit vote did lead to initial volatility in markets, but this has not been exceptional nor out of the ordinary. One widely viewed barometer is the Chicago Board Options Exchange Volatility Index (VIX). Using S&P 500 stock index options, this index measures market expectations of near- term volatility.
You can see in the chart above that while there was a slight rise in volatility around the Brexit result, it was insignificant relative to other major events of recent years, including the collapse of Lehman Brothers, the eurozone crisis of 2011, and the severe volatility in the Chinese domestic equity market in 2015.
As always, the attention turns to the next “crisis du jour”.
Jim Parker reminds us in this pdf of the following:
When news breaks and markets move, content-starved media often invite talking heads to muse on the repercussions. Knowing the difference between this speculative opinion and actual facts can help investors stay disciplined during purported “crises.”
But it’s important to remember, not only must you correctly guess the outcome of the ____, you have to correctly guess how the market will react.
What we do know is that markets incorporate news instantaneously and that your best protection against volatility is to diversify both across and within asset classes, while remaining focused on your long-term investment goals.
The danger of investing based on recent events is that the situation can change by the time you act. A “crisis” can morph into something far less dramatic, and you end
up responding to news that is already in the price.
Journalism is often described as writing history on the run. Don’t get caught investing the same way.