On "Brexit" & Market Declines {Conclusion}

Here is the conclusion to yesterday's post and how I think investors should primarily be focused.

"What I think investor should focus on instead is whether they have their investments structured in such a way that their risk profiles match up with their return expectations.  Somebody who for example cannot live with the market's volatility shouldn't expect stock market type returns from their investments and should think about having a much higher percentage of their assets in safer investments.  I understand that right now those safer investments like bonds or CDs don't yield a lot in terms of interest, but the higher longer term return potential of equities  might not be what that person can stomach.  On the other side somebody who has invested a larger percentage of their assets in equities {either by individual stocks, mutual funds or Exchange Traded Funds} will have to be more comfortable with higher volatility and understand that their investments can decline in value.  I think investors should be concerned about Brexit just like I think they should be concerned about our upcoming elections and the performance of the economy, but I think to be worried about what will come out of Europe in the next few days to the point of having 100% of assets in cash means that person should rethink their risk/reward profiles.  

Finally there are only three ways I can think of how markets will respond to the Brexit vote, regardless of how it turns out.  In general equity markets can go up, basically go nowhere or trade down.  Now assuming somebody is correct about a steep market decline  and they have actually sold out and gone to cash, then they have another decision which is when to get back in the markets.  Many folks who sold out of their equity positions in 2008/2009 never got back in the markets and have missed a significant bull market since then.  Also what happens to the investor who sells out on bad news or market jitters  and then stocks go sideways or worse from that person's point of view,  trade higher.  When does that person get back in?  What if stocks respond to a a "remain" or "leave" vote with a rally?  Not only does the person who sold out need to figure out when to get back in but now they've also missed out on the profit potential.  

Getting investors in tune with their individual risk/reward criteria is the most important thing as that drives asset allocation.  Look for all I know Britain will leave the EU and stocks will go through a bad period, maybe even a steep short term decline.  But those who've bought into getting their portfolios aligned with their goals should be able to sleep better at night. "

Back Monday.