Advice as markets react to "Brexit": Take some deep breaths and don't do a thing
CNBC, Ron Liber
The impulse when the stock market abruptly plunges is to do something. Anything. Our life savings are often on the line, after all.
But that's just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last day or two (and they may well have for some people who live and work in Europe), it probably doesn't make much sense to overhaul an investment strategy based on a blip of market activity.
So pour yourself a drink, or sit down with a pint of ice cream, and consider the following six things.
1. You are not the stock market.
Chances are, your portfolio and net worth consist of a diverse mix of assets. If you have a home in the United States, its value hasn't fallen this week. Some bond and commodity funds may have risen.
2. If you have been investing in a global portfolio of stocks in the last seven years, you are most likely a winner.
It's generally a bad idea to look at your investment statements too often, but take a quick peek.That gain you see is one reason you are in stocks in the first place. Plenty of research shows that if you miss just a few days of the market's biggest gains, your long-term portfolio will suffer badly. If you decide to put a bunch of your money in cash in the next few days, how will you know when to get back in the market? You'll probably be looking for a sign, and that sign will be the very rebound days that you will have missed out on.
Still uneasy? Consider a third point.
3. At some time in the past, when you were not scared, you made a decision to construct your portfolio a certain way.
You knew that stocks involved risk and that the returns they have traditionally delivered, above and beyond what cash and bonds do, was the reward for your persistence. Nothing about the vote for Britain to leave the European Union suggests that the fundamentals of capitalism have changed. So neither should your confidence in very long-term ownership of the pieces of the for-profit enterprises that benefit from your fortitude.
Nobody knows for sure whether we're in for a decline in the stock market of 10 or 20 percent, or more, even if there is a wholesale breakup of the European Union. Increased volatility is likely. But if all of this does happen and you are a regular, long-term investor putting a bit away each pay period, you'll be buying more when prices are lower.
4. Long-term investors have time to recover.
I know too many 70-year-olds who sold all of their stocks in 2009 and are healthy enough to live to 100. They'd be going on a lot more vacations now and be worrying less about long-term care if they had held firm.
Worried about a 529 college savings plan for a 12-year-old? Hopefully, you weren't 100 percent in stocks with six years to go before needing money for tuition. Still, you have at least nine years for a portion of that portfolio to recover from any sustained downturn. If that 12-year-old is the oldest of at least two children, you could use cash to pay some tuition bills for the oldest and let some of the account ride even longer for the next child. Let's say you still have trouble sleeping. Then you may be the sort of person who needs to consider a fifth point:
5. Not everyone can handle the stress of investing in stocks.
You can't say that nobody told you there'd be days like these. Strange days indeed come with the program. There will be surprises always, often when most talking heads thought something else would happen. So try to give the situation in Europe some time to work itself out, and consider the alternatives. There are few investments that can deliver the kinds of returns that global stocks can without their own accompanying anxiety and uncertainty.
Another alternative is to save a lot more in safer investments like cash or certain bonds. Most people don't have enough income to do that easily, so settling for lower returns will mean a combination of working longer and living modestly, forever. For some people, that is a fine trade-off.
One final point for new investors (and their parents and grandparents, who ought to be counseling them right about now):
6. This is what markets do.
Again, there is absolutely nothing abnormal about what is going on here. Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you'll need to retire someday. It would take decades of systemic economic and political erosion to prove otherwise, and a day or two of market declines do not suggest that anything like that is upon us.