I spend the day of Brexit in hospital.
Honestly, the referendum to vote, as part of David Cameron’s campaign promise to get into office as the prime minister, was suppose to be a non-event.
I was honestly more interested in the NBA Draft, which happened on the same day.
As the day went on, it seems we have a surprise on the cards.
The world market showed that they were surprised by the outcome.
At this point, if you see one guru that says they expected this outcome, take that as a hindsight bias. I honestly, cannot believe how many people would have seen this coming.
I have some thoughts, but I will keep them short. I hope it serves to help you make better decisions.
1. This Exit is not going to be a turn key process
It is unlikely that there will be a U-turn, seeing how horrified some who have voted to be out are regretting their decision. UK will evoke a treaty whereby they will negotiate with the EU regarding the terms to leave the EU and their future relationships.
This is likely to take two years or more.
I see this as a complex process and not going to be something done easily.
The best example is that Greenland who were part of Denmark, chose to leave the EU and it took them 3 years and some haggling over fishing rights to finalize their departure.
What this means for investors is that, the markets are shocked now, due to the uncertainty. When things become clearer, the market will attempt to price in the new world scenario, be it for the better or dire.
There will be much ups and down, and we will revisit this again.
2. Your investment decision may or may not need to pivot due to Brexit
These macroeconomic cross currents may or may not affect your investments.
This very much depends on your wealth machine, which is the different way you build sustainable wealth with different financial instrument.
For example, if your wealth machine is holding a through a portfolio of passive index exchange traded funds, in a proper allocation, these are just market volatility, and you should follow your system in your wealth machine.
If your wealth machine in this case, involves tactical shifts when volatility changes, particularly to the downside, then take action according to your system.
If your wealth machine is through active investing though a portfolio of local stocks, then your system should involve you questioning yourself:
- What is this change, can you make sense of it
- How does this affect the individual companies on a company level in terms of their future cash flow and revenue
- Have they impacted any of the assumptions or premise on your individual companies, and if so, should you sell first or that you believe this is entirely favorable to the individual company?
- Are there opportunities due to the volatility? These could be stocks that see price drops who at this point are not affected by this Brexit development, or companies that are impacted in the region, but the prices corrected more than the true reality.
You may realize that if your wealth machine requires you to be very accurate in your prediction of the macro-environment, that will be a very challenging situation to be in considering the cross-current developments and what is the eventual effect. I do not envy you.
3. Brexit or not, You should have a System
Your plan for your wealth machines should always involved what the machine needs to build sustainable wealth. That can very well be how to get out, or should you even get out.
When there are heighten volatility, you intuitively follow this Standard Operating Procedure (SOP) for your wealth machine.
It should not be the case of what should I be doing now. The system should involve you thinking before this, there will be episodes of volatility to the upside, volatility to the downside, how much I have allocated to stocks, bonds, cash.
More importantly, it should involved possible events, and the impact, and your course of action. Volatility should rise, it is a given, it is a question of when. If you have not roughly have an idea, you are naive there.
4. Two Articles that I pay attention to
They caught my attention for different reasons.
The first one from Cullen Roche, because I believe he is a very smart thinker. Here is his reluctant piece on the magnitude and the impact and what you should do.
I really like how he put things into a few short paragraphs.
The second piece is one from a UK blogger who shares his financial independence retire early (FIRE) journey.
This piece talks about how this impact him as one with vested interest and how it impacted his plan.
I realize the benefits of building these wealth machines guards you from some of these macroeconomic changes but also the quality of the scenario planning for the people who are on this path.
5. Putting important decisions into the hands of people who cannot evaluate well
Is going to end in a problem.
I see the mirrors of what transpired in UK as so similar to what happen in the Singapore General Election of 2010.
Many made the decision primarily on the changing migration decisions undertake by the incumbent government. This more so for Singapore and less for UK considering for EU if you hold that passport you can move and get a job easier in different member countries.
The main similarities here are the pain points faced by the people and what swung the votes. However, UK takes it all the way.
Whether to leave or not requires looking at the whole portfolio of positives and negatives, across various decision points. It is not an easy decision.
And the common folks are usually not build to evaluate various scenarios, pros and cons.
They vote on the issues closest to their heart. And that is usually the closest pain, jobs, changing landscape for the worse, higher cost of living.
David Cameron will go down in history books for this referendum more than anything.
I suppose the pain is deep enough for the UK people, well at least majority of them, to vote like this. In most situation, these kind of voting result is more akin to a country where the people feel the existing system is not working, and would want a change, whatever it is.
6. It serves as a shining example for the Singapore incumbent to use in future elections
The incumbent political party in Singapore, have in the last election, raise many times the scenario of what happens if you have less than competent people managing the country, not having a strong mandate or majority of the country manage by the incumbent.
What will eventually happen in UK, would be used as an example of what we should be careful about.
We will be warned that.