There has been plenty of emotion on the share market lately.
Of course, volatility hit a peak on Friday when Britain voted to leave the European Union, much to the bewilderment of finance experts and betting agencies around the world. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) dropped 3.2% while other markets, including Germany's DAX, experienced even sharper falls.
But local shares rose again on Monday, despite shedding more than 1% of their value early in the session. The main bourse ended the day 0.5% higher with shares of a number of companies enjoying strong rebounds, although the Sydney Futures Exchange suggests we could be facing a tougher session today.
What this highlights is the lack of clarity in the minds of investors right now. Never before has a country left the European Union, so what happens next is totally unclear.
Do investors buy to take advantage of the lower share prices? Or should they sell to avoid further losses?
Buy? Or Sell?
Selling may seem like the most logical thing to do right now.
After all, nobody likes losing money, and there is certainly the potential for that to happen in the coming days and weeks as markets come to terms with Brexit and adjust the amount of risk they are willing to assume.
There is little doubt that some (note: the majority will likely stay invested) investors will decide to pack it in, even if that means locking in some hefty losses. Right now, all they can think about is the safety of the sidelines, and they'll do whatever is necessary to get there.
But as The Australian Financial Review recently noted (emphasis added): "(one thing is) for sure, whenever there is a large shock like Brexit, it doesn't take long for (the) sharemarket to exaggerate the probability of what can go wrong."
It also (rightly) notes that "going with the crowd is usually the wrong thing to do."
It has already been established that Brexit's direct impact on Australia is likely to be minimal, with other European countries being far more exposed than our economy. It's what could happen next that appears to be freaking investors out, and some (or all) of that may never actually come to fruition.
Reuters quoted Jeff Kravetz, a strategist at the Private Client Reserve at U.S. Bank as saying: "In the end, when markets start to settle down, I think they are going to realise that this is not the end of the world."
Still, Friday's Brexit vote has created both short term and long-term risks that very few investors or finance experts thought likely. What's more, investors are right to be both uncertain and cautious of what could happen next, and invest accordingly.
To me, that means these three things:
- Keep some cash handy. You don't want to be completely exposed to the market if conditions do worsen, while you'll also want to be able to buy great businesses trading at great prices if or when the opportunity arises.
- Don't buy everything that falls. As I mentioned previously, investors are right to be cautious, particularly of companies that could be directly impacted by the fallout. For example, BHP Billiton Limited (ASX: BHP) could be hit by a fall in global investment, while QBE Insurance Group Ltd (ASX: QBE) also maintains heavy exposure to Europe. Shares in the local tourism sector could also be exposed given that Brexit could cause some Britons to delay any travel plans to Australia.
- Look for companies caught in the sell-off. Some companies will likely be sold down even though they are unlikely to be impacted (at least not in any major way) by the Brexit decision. This could be a great opportunity for investors who are focused on the long-term and willing to ignore short-term market noise.
If it's any consolation, some of the world's greatest investors are likely licking their lips at some of the buying opportunities they may encounter in the near future. Of course, unlike Warren Buffett or Peter Lynch, ordinary investors don't have billions of dollars in cash they can afford to spend…
But they should at very least consider setting an amount of cash aside that they can afford to put to work should such opportunities arise.
