Last Thursday, voters in the United Kingdom chose to leave the 28-country European Union. The unexpected result has caused stock markets around the world to post sharp losses, with the S&P 500 Index falling 5% and international stocks shedding 10% in just two trading days.
No one knows exactly how “Brexit” will ultimately impact the United Kingdom, Europe and the rest of the world. As the process of England’s withdrawal will stretch over a considerable length of time, the enduring effect will not be known for many months or even years.
As global investors uncover new information and reassess their expectations, market volatility is likely to persist. During times like this, it is important to maintain perspective:
Volatility works both ways: You don’t often hear investors complain about sudden surges in the value of their portfolios. Yet, over the past 20 years, large daily gains in stock markets have most often occurred following dramatic losses. Sticking around to benefit from these unexpected days has been an important and necessary ingredient to successful long-term investing.
Global diversification softens the blow: A typical Vista portfolio is invested across 12,000 individual company stocks across 44 countries. Friday’s losses ranged from -12% (Spain and Italy) to -0.4% (Malaysia). While today’s focus is on Great Britain, it represents just 4% of our stock portfolio. Exposure to any single market is limited because we expect there to be periodic and unanticipated disruptions in global stock markets over time.
Nothing protects like safe bonds: It is during periods of market stress when bonds typically shine brightest. The safest bonds in the world—U.S. Treasury’s, TIPS and high-quality international government bonds—are what anchor our bond portfolios. While stock markets have swooned the past two days, the safest bonds have gained between 1% and 1.5%.
Stick to your mix: While a portfolio’s expected risk and return is determined by its stock/bond mix, the actual returns earned are determined more by adherence to that allocation than the mix itself. In other words, it’s our own behavior—not our portfolio’s—which will determine our investment success today and in the days to come.