Economic News

Media Hoopla Aside, Markets Did Not "Plunge" After Brexit

As I wrote last week, the Brexit event was not the “market plunge” that the media made it out to be. For June, the MSCI ACWI (remember, that is All Country World Index, our primary benchmark) was down 0.72% and is up 1.36% for the year. The MSCI World Ex USA international stock index was down 3.19% in June—again, hardly a “plunge.” The biggest and shortest-term effect of Brexit has been in foreign currency exchange rates. The British pound and the euro have declined in value versus the U.S. dollar. A stronger dollar increases the costs to foreign buyers of U.S. exports and decreases the costs to U.S. buyers of foreign goods. This exacerbates the recent trend of a strong U.S. dollar reducing foreign investment returns. But a trip to Britain is now cheaper!

The longer-term impact is potentially negative since it reflects a trend toward nationalism and less global free trade. Exactly how this will unfold remains to be seen.

T. Rowe Price recently published interesting research on the historic returns between U.S. stocks and international stocks. Since 1973, returns have cycled back and forth, with the median time for either U.S. or international stocks to outperform each other ranging about three to four years and the longest period of outperformance of either asset class being 6.25 years. We have now passed the longest time period for U.S. stocks to outperform international stocks. The pendulum will swing back for patient investors.

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Should we make more changes more often in your portfolio? I have cited Warren Buffett in recent writings. His 2005 Annual Report to Shareholders referenced Isaac Newton’s three laws of motion and cited them as works of genius. To this, Buffett added a Fourth Law of Motion: “For investors as a whole, returns decrease as motion increases.” The more changes one makes, the more one risks being wrong. Investing is contrarian!

We welcome Joanne Skinner to our staff as a part-time Client Service Assistant. We have grown over the years and are increasing our staff to continue to provide the best client service that we can. Joanne will be working 20 hours a week, and we look forward to having her as part of our team.

Enjoy these summer days!

As always, please contact us with any questions, news or comments.

Brexit: Heed the Facts, Not the Hype

The media is a successful investor’s worst enemy. They sell hype. I cringed when I read that the stock market had “plunged” on Friday and investors’ 401(k) accounts had been severely damaged.

Let’s look at the facts:

First of all, the stock market had been up earlier in the week of June 20th in anticipation that the Brexit proposal would result in Britain staying in the European Union.

Here are total returns of broad stock market indices ending Friday, June 24, 2016, and we draw your attention to five-year returns (as we always do) for the minimum time period to measure a stock market investment:

Fund Name One Day   One Week Year to Date Five Yrs
Vanguard Total International Stock Fund -7.09% -2.08% -3.31% +0.82%
Vanguard International Developed Markets -7.73% -2.49% -5.41% +2.43%
Vanguard International Emerging Markets -4.01% -0.14% +3.31% -3.64%
Vanguard U.S. Total Stock Market -3.65% -1.61% +0.67% +11.83%
Vanguard Index 500 Fund -3.59% -1.62% +0.74% +12.30%

  A one-day loss of 3% to 7% is not a “plunge,” in my opinion. A drop of 15% or more in one day is, such as -23% on October 19, 1987. And we all know we lived through that.

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Successful investing is a contrarian process. Buy and/or hold when your gut tells you to sell. Sell when your gut tells you all is great!

More news to come on this whole event, but for now, focus on the facts and the actual results. Not as bad as the media screams!

As always, please contact us with any questions, news or comments.