If you’ve happened to look at your portfolio lately, you may be wondering what the heck is going on with the stock market.
In a surprise move, the United Kingdom voted on June 23 to leave the European Union, and that has triggered massive selloffs in stock markets around the world. Why? What will the impact be? And what should you do about it? Let’s take those questions in reverse order.
What should you do about “Brexit”?
For most people, the answer is nothing. The vote for Britain to leave the European Union (referred to as the “Brexit” vote) is a surprise. But don’t let your emotions get the best of you. Better to just hold on. In fact, you might not want to look at your brokerage account for a little while. The Dow Jones Industrial Average, or “Dow”—a price-weighted average of 30 of the most significant stocks traded on the New York Stock Exchange—fell more than 500 points on Friday.
But remember, we can point to many down Dow days that had only short-term impact. Like September 29, 2008, when the Dow lost 778 points. Or Sept 17, 2001 (right after the 9/11 attacks), when the Dow lost 685 points. And in the so-called “Flash Crash” last August 24, the Dow fell more than 1,000 points in the first five minutes before ending the day down 588, but had recovered completely by the next week.
In those cases, and on the dozens of days when the Dow has lost 400-500-600 points or more, the market has recovered. Sometimes, within a week or two. In fact, stock prices were already starting to recover by mid-morning.
So don’t overreact. Selling when the market is down can lock in losses and lead you to make one of the biggest investing mistakes of all if you wait till the market starts climbing to jump back in: Selling low and buying high. In fact, if there’s something you’ve wanted to buy—a stock or an exchange-traded fund—it may be a good time to buy it.
Why have markets reacted so badly to the Leave vote?
There are plenty of reasons why economists think the U.K.’s exit from the E.U. is bad for Britain, Europe and the world. Trade could become more complicated—not just between Britain and E.U. nations, but for American companies that do business in Britain. London could lose its status as an epicenter of the financial world. And with the British Pound losing so much value against other currencies, trade among countries will be dramatically affected. For a while, some British goods might be cheaper in the U.S.; but that’s ultimately a bad thing because America’s goods will be more expensive in the U.K., hurting American businesses.
All that’s true, but the real reason markets have reacted so poorly to Brexit is they hate uncertainty, and they hate surprises. The Brexit vote represents both in spades. What will happen when Britain leave the E.U.? Truthfully, no one knows. It hasn’t happened before. And that’s what has spooked markets. It’s at least a two-year process, during which Britain will have to renegotiate many elements of its economic relationship with the rest of Europe, and every one represents a potential uncertain outcome. Markets hate that. To make things even more unpredictable, there’s some speculation that Britain could negotiate some changes with the E.U. and there could be a second Brexit vote—and Scotland’s leader has threatened to organize another referendum on whether Scotland should separate from the rest of the U.K. Talk about uncertainty.
The Brexit vote impact is so important to the U.S. that it’s part of the reason the Federal Reserve, our country’s central bank, decided not to raise interest rates recently.
“The U.K. vote to exit the European Union could have significant economic repercussions,” Janet Yellen, chairwoman of the U.S. Federal Reserve, told Congress before the vote. “That would negatively affect financial conditions and the U.S. economy.”
Brexit’s most lasting impact could be a domino effect on both the E.U. and the U.S. Other European countries with mixed feelings about the E.U. might now consider leaving, creating even more uncertainty. And the value of trade treaties might be called into question, undermining U.S. efforts to implement free-trade deals with European and Asian-Pacific trading partners.
For now, the immediate lesson to learn from Brexit is this: There are many external, uncontrollable factors that can impact the value of your stock portfolio. That’s why you should invest money with a mid-term to long-term horizon in mind. That way you can ride out downturns like this—and maybe even benefit from them by buying stocks or funds at a discount that then increase in value over time. At the least, it has historically paid off not to focus too much on day-to-day fluctuations like this, and to simply stay the course.
This story has been updated to reflect the market’s close on Friday.
June 24, 2016