19
April
2017

Fear in the markets

Brexit sparks fear in the markets

By now we are all more than aware that the people of Great Britain recently voted to leave the EU. This caught everyone by surprise and resulted in markets all over the world plummeting. This is a perfect working example of investment decisions being heavily influenced by emotions.

 

The financial planning process involves developing investment strategies to achieve goals based on long time frames, utilising over 100 years of data to predict statistically likely outcomes. The whole premise of this process is that exposure to each of the various asset classes over time will produce a predictable result.

 

Through the course of investment there will be a number of events that occur that will have either positive or negative impacts on investment assets over time. However, the overall performance will move towards the average and will have reasonably predictable outcome ranges.

 

The whole process works by not attempting to predict the market or the effects of certain events. The problem is that often fear and greed turn our attention to the short term, and may lead to abandoning our long term strategy.

 

The Brexit decision has been a classic example of fear leading many investors to abandon long term strategies and sell stocks. As soon as it became clear that the “leave” vote would be successful, share markets all over the world fell sharply. The ASX fell over 200 points on the day of the announcement.

 

Market reactions like this are almost solely driven by emotion. The Brexit does fundamentally change the future performance of many companies which in turn impacts the value of the company shares.  It is unlikely that many that sold last week were making calculations on the likely future earnings of the investments they hold.

 

The issue is that when large numbers of people are reacting to the same event in the same way, you’re buying or selling at exactly the wrong time.  When selling out of fear while others are doing the same thing, it is likely we will be selling below the market value.

 

What normally happens after an emotion based sell off, people are keen to return to their long term investment position and will look to re-enter the market.  However, they are not keen to re-enter until their confidence returns, which is usually after the markets have rebounded. This results in them buying back at a higher price than they sold.

 

This emotion driven investment sees them stray from the long term strategy, crystallising a loss in the process.

 

 

Although at times easier said than done, it is very important to not get to caught up in the events and short term volatility associated with your investment and remember the long term strategy is based on factoring in a century of similar events occurring.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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