By Adam D. Koos, CFP®
Before the Brexit, it was an absolute certainty among pollsters and the media that the U.K. was going to stay in the E.U. Then they didn't, and the market fell precipitously for two days. The sky was falling. Clients started emailing and calling our office, asking what they should do. Then almost as fast as it came, the Brexit was an afterthought. Four trading days later, the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.49% was right back to where it started prior to the British vote, and now it's over. Or is it?
When a hurricane wipes out an entire metropolitan area, and the market quickly retreats and then recovers, sure ... that's an event-driven, violent pullback. As horrible as they are, when there’s a terrorist attack and the market takes a quick beating, it's just that, a quick beating, and it's over. These are one-time events that, once behind us, are generally over with. There might be economic fallout resulting from the wrath of something as horrible as hurricane Katrina, but generally speaking, these types of selloffs are largely emotional.
The Brexit selloff was surely emotional. What's different is, in my opinion, it's not over. Aside from the fact that it could take years for all the U.K.'s trade agreements to be rewritten, and aside from the debt they've incurred as a result of being one of Europe's "big brothers," they have a long way to go toward becoming economically and politically autonomous again.
The emotional reaction that caused the post-Brexit selloff was the same emotional reaction that resulted in the dead-cat bounce that took place over the following trading days into the holiday weekend, but that doesn't change anything about the big picture as it pertains to the health of the stock market overall.
I had someone peek their head in my office last week after meeting with one of our financial advisers, and this is what they said:
"So, this has been a crazy market. I just talked to Andy, and I know that I should be selling out of my 401(k), but the market has come back twice now. Do you think now is a good time to get out, or should I hold on a little longer?"
Never mind the fact that, at our office, we only own a single stock (in our aggressive model portfolio). Otherwise, we've had absolutely no allocation to stocks here or internationally for months now. So I pulled up the chart below on the big screen in my office, looked at it together, and asked him, "How many chances do you think you're going to get to sell at higher prices? How many times are you going to pass on these bounces before you end up married to the stocks you own?"
Think about it. Most readers have been there before. You didn't want to sell when the downtrend was confirmed by the January lower low, right? It came back, so now that market is soaring to all-time highs again, there are riches to be made, right? So now you don't want to sell at these high prices, of course. Who wants to sell high?
If this market continues its long-term downtrend and you participate in all or most of it, you're still not going to want to sell if it drops again because you'll be "hoping" for another rebound that may or may not occur until after the market has wiped out 30%-50% of your hard-earned savings. So are you going to pass on these prices again, "hoping" for something better tomorrow? How high does the market have to go before you're ready to sell high?
One of my mentors years ago once told me, "Price is what you pay at the beginning of any decision or transaction. Cost is the long-term consequence of your decisions."
Would you buy a car without ever servicing it? No oil changes, filter change, tune-ups, new tires, fluid refills or brake changes? This is a lot like investing your money, diversifying it, and "hoping" it continues to grow in value. You know what happens when your brakes fail, don't you? Hope is not an investment strategy.