No need to panic and throw your portfolio into detention with the Brexit Club this weekend.
There is a massive difference between investing for goal achievement over decades and short term speculation. Everyone knew the vote for the U.K. to leave the European Union would be close. Most expected the U.K. to stay in the EU. And the U.K. very well may have another vote and vote to stay after they assess the economic damage and isolation this vote may cause their country. To put things into perspective here, the U.K. makes up about 4% of global GDP. They are the 9th largest exporter of goods in the world, and the service sector makes up about 78% of their GDP. Their exports are primarily comprised of Oil, Automobiles, and Gold. British Petroleum isn't going to relocate or lose customers over this, demand for gold may actually increase, however the auto industry may exit the U.K. and head to to EU countries, dependent upon the trade agreements that are struck with the EU. It is also possible that London will lose its position as a financial capital of the world, with many financial companies exiting for other places in the EU (could the luck O' the Irish come into play here?). Given that the U.K. and EU countries have such strong economic/trade ties and alignment of economic interests, one can very reasonably assume that agreements will materialize quickly between the "divorcing" parties. Germany and the U.K. are closely tied to one another due to trade, although Germany is more important to the U.K. than the U.K. is to Germany. Sure, there will be jobs lost in the U.K, and as the U.K. becomes more independent/self reliant there will be other jobs created over time. Should central bank and government measures be inadequate to stimulate the economy, the U.K. could go from a stronger economy into a recession. There will be short term gyrations and panic, as there always is. However, markets adapt, economies adapt, and consumers adapt.....the sun rises the next day.
Since we are investors and not speculators, NO, this does not change anything in our portfolios; and more importantly it does not materially affect our client's financial plans. We build these types of events into the plan assumptions and account for them already. No one can foresee the future and speculate correctly all of the time. That is why we employ a process based on empirical evidence and the science of investing. We know what we are going to do during these types of events before they even arise. Should international markets decline in value far enough, we will be buying. Should bonds rally enough, we will be selling. We have been neutral to under weighted internationally in our portfolios, and over weighted in cash. This is a mini-crisis with risky assets (stocks) going down and safe haven assets (high quality bonds) going up while traders and investors try to ascertain the impact of the Brexit. Our clients hold both stocks and bonds in their globally diversified portfolios, which will reduce the impact of the negative volatility (although diversification cannot completely eliminate the volatility). With our active rebalancing strategy, we will be monitoring all asset classes for potential trades to buy beaten down assets and sell high priced assets that have drifted from their target weightings within the portfolio. We do not know what will happen over the next few days, and neither does anyone else. However, our client portfolios are tied to their financial goals and over the long run, today’s results will have little to no impact on the probability of achieving success. This is the power of directly linking how client portfolios are invested to their long term life goals through the financial planning process and stochastic modeling.
We encourage you not to get caught up in the media frenzy or allow this or any other event to have an impact on your mental well being. It will be a long two year process for the U.K. to officially exit the EU. During that time period, trade agreements will be reached, and there may be an additional referendum with voters in the U.K.; and the voters may very well change their minds based on the conclusion of those agreements. The global economy expands and contracts. Global markets rise and decline. These assumptions are all built into our client portfolios in the construction phase, and we know exactly what actions we will take when these events arise. We will keep abreast of the news and markets for you, and when the environment calls for action in our client portfolios, rest assured we will be ready to take action. We encourage you to relax, stay at the head of the class, and avoid joining "The Brexit Club". Please contact your LTWM advisor with any questions or concerns at any time.
The image above has been used under the "Fair Use" clause of 17 USC Section 107.
1. Standardized Performance Data and Disclosures
Russell data © Russell Investment Group 1995-2014, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2014, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; © 2013 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2014 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, liquidity, prepayments, and other factors. REIT risks include changes in real estate values and property taxes, interest rates, cash flow of underlying real estate assets, supply and demand, and the management skill and credit worthiness of the issuer.
Lake Tahoe Wealth Management, LLC is an investment advisor registered in the States of Nevada, New York, North Carolina, South Carolina, and Texas.
The principal risks of investing may include one or more of the following: market risk, small companies risk, risk of concentrating in the real estate industry, foreign securities risk and currencies risk, emerging markets risk, banking concentration risk, foreign government debt risk, interest rate risk, risk of investing for inflation protection, credit risk, risk of municipal securities, derivatives risk, securities lending risk, call risk, liquidity risk, income risk. Value investment risk. Investing strategy risk. To more fully understand the risks related to investment in the funds, investors should read each fund’s prospectus.
Investments in foreign issuers are subject to certain considerations that are not associated with investment in US public companies. Investment in the International Equity, Emerging Markets Equity and the Global Fixed Income Portfolios and Indices will be denominated in foreign currencies. Changes in the relative value of these foreign currencies and the US dollar, therefore, will affect the value of investments in the Portfolios. However, the Global Fixed Income Portfolios and Indices may utilize forward currency contracts to attempt to protect against uncertainty in the level of future currency rates (if applicable), to hedge against fluctuations in currency exchange rates or to transfer balances from one currency to another. Foreign Securities prices may decline or fluctuate because of (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets.
The Real Estate Indices are each concentrated in the real estate industry. The exclusive focus by Real Estate Securities Portfolios on the real estate industry will cause the Real Estate Securities Portfolios to be exposed to the general risks of direct real estate ownership. The value of securities in the real estate industry can be affected by changes in real estate values and rental income, property taxes, and tax and regulatory requirements. Also, the value of securities in the real estate industry may decline with changes in interest rate. Investing in REITS and REIT-like entities involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. REITS and REIT-like entities are dependent upon management skill, may not be diversified, and are subject to heavy cash flow dependency and self-liquidations. REITS and REIT-like entities also are subject to the possibility of failing to qualify for tax free pass through of income. Also, many foreign REIT-like entities are deemed for tax purposes as passive foreign investment companies (PFICs), which could result in the receipt of taxable dividends to shareholders at an unfavorable tax rate. Also, because REITS and REIT-like entities typically are invested in a limited number of projects or in a particular market segment, these entities are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. The performance of Real Estate Securities Portfolios may be materially different from the broad equity market.
Fixed Income Portfolios:
The net asset value of a fund that invests in fixed income securities will fluctuate when interest rates rise. An investor can lose principal value investing in a fixed income fund during a rising interest rate environment. The Portfolio may also be affected by: call risk, which is the risk that during periods of falling interest rates, a bond issuer will call or repay a higher-yielding bond before its maturity date; credit risk, which is the risk that a bond issuer will fail to pay interest and principal in a timely manner.
Risk of Banking Concentration:
Focus on the banking industry would link the performance of the short term fixed income indices to changes in performance of the banking industry generally. For example, a change in the market’s perception of the riskiness of banks compared to non-banks would cause the Portfolio’s values to fluctuate.
The material is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current, good faith views of Lake Tahoe Wealth Management, LLC (LTWM) as of the date indicated and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, LTWM does not guarantee the accuracy, adequacy or completeness of such information.
Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and LTWM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated in forward looking statements. No investment strategy can guarantee performance results. All investments are subject to investment risk, including loss of principal invested.
Lake Tahoe Wealth Management, Inc. is an investment advisor registered in the States of Nevada, California, New York, North Carolina, South Carolina, and Texas.