When a fire breaks out, the instinctive reaction is to dash for the exits. That was certainly the case for many investors after the shock of Brexit.
Britain’s burning
New figures from the Investment Association show private investors withdrew an astonishing £3.5bn from UK funds in June, as they sought to flee EU referendum conflagration. That dwarfs the amount of monthly withdrawals during the financial crisis. During one of the worst months of all, January 2008, private investors withdrew “just” £561m from UK investment funds.
Nobody doubts the reason for the summer exodus but the scale of it will surely have come as a surprise. It was led by investors in the property sector, who withdrew £1.4bn from stricken funds, forcing some to suspend trading or impose hefty penalties on sellers. Another £2.8bn was withdrawn from equity funds, including £1bn from the UK equity sector. European funds also fared badly, while fixed interest and absolute return funds benefitted as relative safe havens.
Keep calm and be Foolish
Investors were only following their instincts, but once again, their instincts led them astray. Rather than crashing, UK stock markets boomed, with the FTSE 100 up roughly 7% since the referendum, and even the FTSE 250 recovering most of its early losses. Once again, too many have ignored the Foolish wisdom we keep pumping out on these pages: market corrections should be treated as an opportunity to buy shares at the new lower price, rather than a trigger to sell them.
By selling stocks after markets have fallen, you’re simply turning paper losses into real ones. You then have to decide when to buy back into the market and will almost certainly get the timing wrong, typically leaving it too late and buying back in at a higher price than you sold. To compound your misery, in the interim you’ll have missed out on any growth and dividends, and racked up needless trading charges. If you sold a stocks and shares ISA, you’ll have lost a chunk of that tax shelter forever as well.
Stay sane
Brexit shows the danger of responding to events: few people expected the UK to vote to leave the EU, and even fewer expected stock markets to surge as a result. Trying to second-guess that is enough to drive anybody crazy. Instead, investors need to keep their eyes on the long term because over longer periods of five, 10 or 20 years, the stock market should generate greater wealth than any rival investment, and will quickly recover from any short-term shocks along the way.
August can be an unruly month and there may be further shocks to come, but again, you should resist the temptation to sell. Instead, seize the opportunity to top up your portfolios at discounted prices, then wait for long-term market growth and dividend compound interest to work its magic, as it always has done before.
