Today is the day. The Brexit vote is here. And we hear the strident voices shouting that ‘the sky is falling’. Again. And they’ll also tell you: Brexit, here’s how to protect yourself from a market meltdown.
We’ve seen this movie before. And later today and tomorrow, whichever way the Brexit vote turns out, we’ll see tons of ink spilled and hear lots of talking heads slice and dice what it all means one way or the other. Headlines today and tomorrow will be dominated by Brexit. So how do you protect yourself from a potential market meltdown?
As to be expected when there is a Big News event, financial news editors ask their financial news writers to go out and dig something up.
Earlier today I responded to a NAPFA press inquiry from Veronica Dagher, wealth adviser reporter for the Wall Street Journal. She wanted to know what are my clients asking about the Brexit vote, what am I telling them and what changes are being made to portfolios.
Almost one year ago I wrote about the imminent Greek default. The sky was falling then, too, if you recall.
Investing when the sky is falling is a stomach-churning exercise. You have to have faith – in yourself, your investment managers and your plan – as well as a medicine cabinet filled with bottles of Tums.
What does an impending Brexit vote mean for your portfolio? What does any potential bad news do to your bottom line?
Gloria Gaynor probably said it best in her song, I Will Survive.
While I don’t want to dismiss the HUUGE political implications (that’s me channeling my very best Donald Trump) if Britons vote to end their relationship with the EU, the reality is that markets will adjust to new realities after a rocky period. There will likely be a series of down days in the markets as government ministers and financial titans huddle.
But after a correction period, things will adjust to whatever the ‘new normal’ is.
This is not the first nor the last political crisis that will affect investment portfolios. (Can anyone look ahead to November 8th here in the states?) So let’s keep it all in perspective.
All that being said, let me share what I told the Wall Street Journal reporter.
While clients haven’t made any noise about Brexit to me, I proactively increased my cash positions in almost all portfolios to nearly 100%. I was doing this not because of Brexit exclusively. I was already rebalancing client portfolios beginning in May and it made it easy to simply move folks to cash if it made sense (i.e. no huge capital gain issues).
May is that time for my regularly scheduled ‘spring cleaning’ anyway after tax and college financial aid filing seasons. And there is some truth to the whole ‘sell in May’ adage as I noted in a previous post.
And at that point looking ahead to June with the pending interest rate announcement by the Fed, the Brexit vote followed by the austerity plan vote in Spain, the continued weakness in China and then the typical August drop, I felt it’s better to raise more cash and keep more powder dry which I could then dollar-cost-average back into newly remodeled portfolios after each of these events into the fall.
As a hedge I’m likely to add PowerShares S&P 500 Buy Write (PBP), a covered call strategy, to counter some of the effects of a volatile stock market that will provide some zig when the S&P zags with any market reaction over the course of the summer.
Right now, based on this rebalancing and dollar-cost-averaging, most of my clients are back in the market – somewhere between 45% and 60% depending on risk profiles. And with regular dollar-cost-averaging scheduled throughout the summer, everyone will likely be back at 95% to 97% invested by late August or early September.
Just in time for the next politically motivated round of headlines announcing the Sky Is Falling, again.
In which case, I’ll redirect folks back to what I said here which is what I said in my prior post during the Greek default.
And if you want to protect your nest egg from large market losses, you should:
- Diversify globally
- Maintain decent cash reserves
- Avoid losses – easier said than done but by diversifying, actively rebalancing, not selling in a panic and matching your Risk Number to your portfolio, you’ll increase your odds of success.