Should I sell my stocks and ETFs now? Is a major financial crash (like 2008) in the works? Not necessarily. First of all, don’t panic! Remember that markets are creatures of herd mentality, and are driven largely by emotion (fear and greed being the big ones). This is nothing new or surprising. Markets are re-pricing risk in the wake of the UK referendum to leave the European Union. Short-term extreme volatility is to be expected. But this won’t last forever, as the usual market over-reaction settles down.
The Brexit has caused dislocation and will continue to do so, but it will also provide opportunity for investors looking to buy oversold securities. While markets dropped dramatically in the aftermath of the Brexit vote, it’s unlikely to be a replay of 2008, as central banks have plenty of liquidity in reserve to prevent a freeze-up of credit markets.
So, before selling your stocks, ETFs, and mutual funds, take a step back and ask yourself why you really want to sell. What has changed in your asset allocation or your portfolio holdings or your risk tolerance level that would cause you to take such a drastic step? Have all companies around the world suddenly gone bankrupt? Have people stopped buying, selling, and making things? Has the yield curve inverted (often a sign of an impending recession)? Have money managers completely lost their ability to manage portfolios?
Or is it the incessant wall-to-wall media shrieking and end-of-the-world type of pundit-babble you’re reacting to?
Before you do anything, review your financial plan and revisit your investment objectives to ensure your investment portfolio is still in line with your goals. If it is, then you shouldn’t really have to do anything at all.
Panic selling leads to more doubt and fear
In periods of volatility and uncertainty driven by large-scale geopolitical events, it may be difficult emotionally to stick to your plan and stay invested. But remember, panic selling will only leave you with more doubt and fear – doubt that you’ve done the right thing when markets rally (and they will), and fear that you’ll lose out on the biggest gains, which typically occur early in a rally. Buying and selling during market disruptions only incurs extra trading costs, creates possible tax issues, and dampens your overall longer-term returns. But if you have a solid investment strategy and a good advisor, trust them to do their job.
The Brexit vote was a long time coming. It didn’t spring up out of thin air, and most experts believed it would be a close-run thing. Instead of committing your portfolio to assets based on what happens on any given day, it’s far more prudent to accept the reality of financial markets (i.e., they will always fluctuate unpredictably) and allocate assets in a way that aligns with your real tolerance for risk. In other words, most professional managers had already made defensive provision to mitigate risk in their various client portfolios (whether safety, income, or growth) for the possibility of the U.K. voting to leave the European.
A moderate-risk approach
Making portfolios more defensive against the possibility intense volatility, especially against the possibility of volatility that was so clearly foreseeable as the result of the Brexit referendum, you can deploy a couple of strategies. First, in the fixed-income component, look to a strategy using fixed-income funds that have a common goal of generating steady income while maintaining safety of principal.
This can be achieved by investing in shorter-term Canadian bond funds, investment grade corporate bond funds, or Canadian income trust funds.
On the equity side, various defensive and income-producing options strategies are often used by professional portfolio managers to offset risk. To bolster income though the equity component of your portfolio, look to Canadian dividend equity income funds and real estate investment trust funds, which are also inherently defensive equity assets. Focus on low-MER passive, exchange-traded funds to keep overall costs down.
Eye on the prize
As investors, we need to keep our wits about us and stay focused on the long term. Investing is a lifelong process, and if you were to sell every time the markets gyrated, the chances of getting back in just before a rally, recovery, or bull market are slim to non-existent.
Investing takes knowledge and patience. Be calm, stay educated, and make decisions only when you have weighed the pros and cons and are ready to be accountable for the outcome. Remember, media pundits are not managing your money – you are. If you are not sure you are holding the right asset mix and feel that you are overexposed to equities, consult your advisor instead of the news headlines.