“A pessimist is one who makes difficulties of his opportunities and an optimist is one who makes opportunities of his difficulties.” ~Harry S. Truman, 33rd President of The United States of America
There is something interesting about the human condition that causes us to be pessimists more often than optimists. We tend to become uncomfortable with the slightest change to our environment, and that is reflected in the stock market’s response to uncertainty. Investors have a natural behavior called representativeness which causes us to connect the wrong things to one another, and jump to conclusions that one thing automatically means something else. These types of conclusions are usually wrong and lead to bad investment decisions. Such struggles with our inner tendencies are exactly why we depend on the individual financial plans we build and maintain for our clients to determine the long term strategies we implement.
One such event took place last Thursday evening when over 30 million British citizens voted to leave the European Union (EU) by a 52% to 48% margin. The reasons given by those who voted to leave the EU included freedom from extensive regulation imposed by the EU, savings on EU membership dues (2015 estimates of about 8.5 billion pounds or $11.5 billion U.S.), as well as greater control of United Kingdom borders through immigration policies. We continue to believe that this may not be a one-off event, but might reflect a deeper conflict, rooted in a variety of factors that transcend the EU debate, such as the income disparity that continues to grow in developed economies, growing distrust of government elitists, and security concerns that are being fostered by the threat of terrorism in our world today.
Although the long-term impact of the British exit (commonly referred to as “Brexit”) may take two years or longer to determine, the world’s financial markets responded negatively during Friday and Monday’s trading sessions. Today, the markets are rebounding which does nothing more than reiterate the position we continue to hold: that volatility is here for the foreseeable future. As many of you know from your experience with our team, we focus on the long-term and believe you are best served doing the same. We have a strong commitment to alternative asset classes because we believe diversification is a key component to a sound portfolio. However, we do remain aware of these kinds of risks well before they take place and position our portfolios accordingly. For example, ever since the first half of this year we have maintained higher than normal cash positions. As always, we choose not to see this as a roadblock but as an opportunity, and we are confident that this occurrence will not alter our clients’ plans to achieve the outcome they desire.