On Friday, the United Kingdom’s decision to leave the European Union caused one of the largest selloffs in recent history. Concerns about this globally-integrated economic powerhouse leaving the European Union and the impact it will have on the world’s second largest economic region have been played up by financial media outlets nonstop. But will the potential implications of the UK leaving the EU really have an impact on investors that is worth this type of a response from investment media outlets and investors themselves?
Even the vote itself is non-binding and hasn’t really established anything concrete yet. There are still two more years of negotiation ahead that could see just about anything unfold. Naturally, this has created a lot of uncertainty, which has caused a lot of fluctuation in global stock markets. That is simply a symptom of an efficient, forward-looking stock market that incorporates all available information and expectations, not a sign that the world is going crazy or coming to an end.
The fact that one country commands so much attention shows that most people do not have a sense of proportion. Though the UK is an important center of trade, particularly in Europe, from a pure size perspective they are not as large of an economic player as the financial media would lead you to believe. Their economy, though the 5th largest in the world, accounts for only 4% of global GDP, and is only 16% larger than the economy of the State of California! The economies of California and Texas combined are 43% larger than the economy of the UK.
From an investment standpoint, the UK accounts for roughly 6% of the investable universe in stocks and 7% of the investable universe in bonds. So if an investor holds a globally diversified market-weighted stock and bond portfolio, all this concern is really only regarding less than 7% of his or her portfolio!
If that investor has any degree of a home bias (holds more of their home country), and most investors in the US do, it is even less than that!
Our recommendation, as always, is to ignore the financial media because this too shall pass.
Whatever happens with the UK in the short run will have a negligible impact on the long-term return of a globally diversified investor. Though nobody knows what the future holds, constant commitments to globally diversified portfolios have historically rewarded investors over the long run.
Of course, we must always mention, past performance is no indicator of future results.
Want to hear more? Below you can listen to a segment from our most recent radio show that discusses the infamous “Brexit” in more detail.