Fear causes people to do irrational things. And investor fear over the economic fallout from Britain’s decision Thursday to leave the European Union is a classic example, analysts say.
Panic over a possible global recession, induced by a vote outcome that was largely unexpected by the global financial community, galvanized many American and global investors to sell their holdings in the following days. Global markets lost more than a record $2 trillion on Friday as a result. About $800 billion of those losses were in the United States, where 600 points was shaved off the Dow Jones industrial average. On Tuesday, the US stock indexes steadied.
The value of the British pound fell to its lowest level in more than three decades on Friday; the Euro fell too. Panicked investors moved trillions of dollars into more secure funds, like low- to zero-yield government bonds and money market funds.
“When everything goes down at once, it means people are just throwing out the baby with the bathwater,” John D. Spooner, a Boston financial advisor and author, tells The Christian Science Monitor.
And this is precisely what investors should not do in situations like these, says Mr. Spooner and other financial advisors. While the UK could slide into a recession as it untangles itself from the rest of Europe over the next couple of years, on this side of the Atlantic, it’s a great time to take advantage of discounted investments, travel to Europe, and buy cheaper European goods.
“The real investor doesn’t look at last week and this week, they try to look out three to five years,” says Mr. Spooner. “This is just one little blip that long term is not going to be that meaningful, in my view, and will represent a long-term opportunity.”
The headline of his summer newsletter to clients is, “Volatility and fear, yes; end of days, no,” says Spooner. In other words, it’s not that bad; there are many things to feel hopeful about on this side of the pond.
The US economy is stable and the dollar has become more valuable against Britain’s and Europe’s depressed currency. The US unemployment rate is returning to pre-recession levels, the housing market is recovering, and consumer spending is expected to accelerate. On top of that, interest rates are at record lows and are expected to remain low in the near term.
“The US economy is actually a bright spot in the world,” says Raj Sharma, a Boston financial advisor who runs The Sharma Group, a wealth-management team at Merrill Lynch. “We have our problems, but there good things that are happening: We are largest exporter in the world, we invest more abroad than any other country, and there is a lot of innovation going on in tech and healthcare, which is really exciting.”
Mr. Sharma, who sent a pre-emptive letter to his clients after the vote last week to prevent widespread panic, categorized the Brexit fallout this way in his headline: “Be opportunistic, not fearful.”
He says that investors right now should buy shares of American companies that do most of their business domestically and pay out quarterly dividends, or a share of their earnings, in sectors such as healthcare and technology. Multinational companies that do most of their sales abroad are the ones that will be hurt by a recession across Europe.
“Use this opportunity to rebalance your portfolio,” says Sharma. “If you have too much in fixed income, slice some of it off and buy dividend stocks.”
Spooner, too, recommends investing in American companies that pay dividends.
“Blue Chip companies are better investments than anywhere else,” he says, referring to large, stable and thus safe companies that sell staple products and services, which leaves them protected from the vicissitudes of the stock market. These include Johnson & Johnson, utility companies, and big telecommunications firms such as Verizon and AT&T.
“Try to make a laundry list of the 10 stocks that you had always wanted to own,” suggests Spooner. “Pick things that pay strong dividends, better than 3 percent, and that may have a chance to appreciate.”
Over his decades in the financial industry, Spooner has seen the market selloffs a number of times, spurred by investors who made emotional decisions based on fear.
Events like the Kennedy assassination in 1963, as well as rough patches such as the “horrible decade” of the 1970s when interest rates soared to 20 percent, are key examples. When the Dotcom bubble of 2000 burst, it sent the economy into a tailspin. Then came the terrorist attacks of Sept. 11, 2001, and the housing market crash of 2008, the worst market meltdown since the Great Depression.
“And guess what?” says Spooner. “If you stayed in there, and if you bought on fear and anxiety, you would’ve done better than ever.”
Already, the US stock market is inching back from Friday's turmoil, supporting the predictions that the Brexit fallout will not be as damaging as some of those events. The Dow was up nearly 150 points in midday trading Tuesday, and the S&P 500 gained nearly 20 points in the same period.