The Brexit vote sent a ripple of uncertainty through global markets and we all got a front row seat to see how world exchanges react to uncertainty. Trillions in paper wealth vaporized in a matter of hours, the darkest clouds settling over the United Kingdom. Today the clouds have parted and mighty England is still there but the uncertainty remains.
Forces are already at work in the U.K. to unwind the Brexit vote. Frankly, it’s hard to see how that effort could be successful. If nothing else it runs counter to the basic principles of democracy and fairness. There was a vote, the Stay camp lost and that should be that. The Stay camp in Britain is living proof that no one ever dies in politics, the losing side simply gets back up smarter than they were before.
Investing In An Uncertain Future
If you bought in at the Dow Brexit low of 17,140, you’ve already made nearly four percent. That’s not bad for spending a couple days doing little more than converting oxygen to carbon dioxide. Therein lies the key to investing in our new, connected global economy. Global markets tend to overreact to news on the downside due to automatic trading set to a hair trigger on bad news. That’s due to a principle of investing called the Math of Loss.
Capitalizing On Overreaction
If market panics seem like investors running headlong over a cliff that’s because that’s exactly what’s going on. Except it’s not investors, it’s computerized trading platforms that are trading the way their programmer instructed. Since no one knows where the bottom might be, machine traders tend to prioritize against loss and drive the selling beyond fundamentals. This might sound like “buy on the dips” but it’s not the same at all. Instead it’s more like “buy during the panic.” A dip and panic selling are entirely different. The selling after the Brexit was not based on a fundamental problem with the world economy, it was based on surprise and panic. Markets, as you might guess, hate surprises. Surprises trigger panic selling, panic selling presents buying opportunities.
No Particular Trading Skill Needed
It doesn’t take any particular skill to increase your investment returns. You don’t have to time the market, you don’t have to know how to read a company’s balance sheet or how to pick stocks. In February of this year the S&P 500 dipped to a low of 1829 because of turmoil in the Chinese stock market. But Chinese companies aren’t listed on the S&P 500 and corporate earnings still looked pretty healthy. So, I used some of my free cash to buy a low-fee S&P 500 index fund when the market was at 1858. Even during the worst of the Brexit crash I was still in the money on that trade, and that’s not counting capital gains and dividends.
The End Of Buy And Hold
Buy and hold still works over a very long time, but the returns are lower. Using a strategy of buy on the panic, sell on the calm you can increase your returns without incurring a great deal of additional risk. The selling actually has a name, it’s called rebalancing. During the calm times when markets are zooming is when you sell off some of your winners and shift that into cash, bonds and liquid hard assets. That isn’t so much because those investments move counter to the market. Bond yields have been dismal and people have taken a beating in the bond market. You do that because your cash is safer in municipal bonds than the stock market, not because you’re chasing returns. Buy on the panic, then reduce your risk exposure. Otherwise you never lock in those gains and you have nothing that’s easy to convert to cash when the next market panic comes along.
Crumbs From The Market Table
A friend and fellow journalist once described that investment system as collecting the crumbs that fall from the market table and he’s exactly right. But if you collect those crumbs consistently and do it over a long period of time, those crumbs will add up to some real money. So far 2016 has presented two marvelous opportunities for shifting cash into very conservative, low-fee index funds.
There’s another five months left in the year which means there may yet be even more buying opportunities just this year!