Never has so much market wealth been lost so quickly! Investors lost $3 trillion when voters chose ‘Leave’ instead of ‘Stay’. This is more than the wealth that vaporized during the financial crisis of 2009, a mere $1.9 trillion! For investors with no plan, such news is devastating. So, they make an important decision.
Close their equity positions and take a big loss to avoid their wealth from evaporating further. But this is not a financial decision. It is an emotional response to a situation that requires rational thinking. But, let’s look at the consequence of such behavior driven by impulse rather than by planning. Global financial markets started recovering today to the detriment of those who panicked and rushed to sell.
This kind of situation is not entirely avoidable but manageable with planning and rules based investing. It’s not about loss avoidance but about risk mitigation. The first question one should ask is where to put stop loss. This is no different from planning your expenses in advance. Rather than making decisions at Point of Sale, plan what to spend your money on. Use mymoneykarma.com tools to plan your expense and budget for them.
Ask your investment advisor how she would manage your account when such catastrophic events happen. Discuss this before you select your advisor. Brexit is not an event. It’s a process. Markets may recover in the short term but the long term consequences are unknown but volatility and uncertainty are here to stay. A properly diversified portfolio is another approach to consider. It would mitigate the losses and protect from extreme volatility. The Brexit carnage took a heavy toll on banking and financial sector. Banking stocks lost disproportionately. Those who held only banking stocks had more losses than those who had diversified portfolios. Use mymoneykarma.com regularly to monitor your financials.