Emotion on Brexit Driving Investment Decisions?

The Daily Telegraph led its business section with a headline “Brexit vote led to biggest fund exodus on record” this morning. It reported that the referendum result caused the sharpest stock market fund sell off on record, apparently caused by private investors becoming “too emotional” over the vote.

Investors in stock market funds sold a record £3.5bn from their portfolios in June in data reported by the Investment Association. However the press release issued by the Association also indicated that funds under management rose to a record £948bn at the end of June.

Equity and property funds experienced large outflows while fixed income funds received a positive inflow for the fourth consecutive month. It would seem that low interest rates and a dubious capital value outlook does not deter investment in fixed income as investors moved to “safe havens”. Money market funds also had positive inflows.

Mark Dampier of Hargreaves Lansdown is quoted in the Telegraph article as saying “Since 2008 investors have become very driven by events but I have never seen the British public get so emotional about a political event. This is reflected in how people managed their investments over the period. Investors have gone with their hearts instead of their heads and many people who panic sold funds may regret it in the long run”. Indeed they might as stock market indices have now generally recovered from the sharp falls after the Brexit vote.

This writer also saw the phenomenon of dismay among some who wanted to “remain” in the EU. But there is one thing I have learned from investing over the years and that is not to react to panic about economic or other events. Making instant decisions, even when everyone else is panicking and dumping stock, is a sure fired recipe for making bad investment decisions.

Of course Mr Dampier might be laughing all the way to the bank as volatility is something that stockbrokers love. Their profits partly depend on high transaction volumes. Indeed financial commentators in general seem to have exacerbated the situation by giving forecasts of immediate doom for the UK economy. Yes some companies will be affected possibly (actual impacts or data are barely visible as yet), but others will directly benefit from the fall in the pound. Confidence as measured by business and investor surveys may have fallen but that is to be expected when the Governor of the Bank of England seems to be keen on talking us into a recession.

The outcome of the Referendum vote has yet to be worked through and it may be some years before we know how the future will be configured. In the meantime, for long term investors all we should be doing is looking at individual company prospects and their valuations. Avoiding emotional responses is one of the things all investors need to learn.

Roger Lawson

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