Brexit! So What?

| About: iShares MSCI (EUFN)

I've been watching with a mixture of amusement and interest the recent events around Brexit in the UK over the last 24 hours. I'm going to share with you how I'm dealing with this massive event.

The Dow Jones and S&P 500 saw massive one-day declines in excess of 3% on Friday as a result of the UK's decision to leave the EU. The long-term effects of this decision are profound, and the effects will only become clearer over the months and years to come. I believe the UK has missed a trick in deciding to leave the EU.

This is a decision that will have ramifications for years to come. I see an environment where special interest lobby groups now start lobbying the UK government for trade barriers to be erected against various overseas factions to support all manner of poor and failing industries. Innovation and growth will be stifled, and the UK will steadily decline back towards a standard of living last seen in the 1950s. The biggest losers will be the youth of the UK and future generations.

All this aside, I tend to take notice when there are such broad based market falls. Unfortunately, 3% isn't enough to get me started as far as looking at potential bargains, but if further panic occurs, or leads into a stampede for the exits, I may sit up and take notice.

For the moment, my plan is to do nothing, I repeat, absolutely nothing. There will eventually be real economic and structural implications on the UK economy, and possibly various UK-based businesses, but the lion's share of companies will just continue operating as they have been for years.

At this point in time, unless you have a UK-based business in your portfolio, there's probably no real need to actively review your exposure. In my own case, I have significant exposure to BP (NYSE:BP), which is headquartered in the UK. However, BP is a global business, with assets and operations all over the world. It is a UK business in name alone. I have zero concerns of Brexit on this business.

The massive falls in world markets reveal some interesting lessons for long-term investors

Markets shoot first and ask questions later

What we witnessed today is arguably a massive overreaction for any globally focused, long-term investor. I say this because there for most global investors with a long-term outlook, this is a non-event. There will likely be a real reduction in value for businesses with significant UK exposure, particularly if the UK becomes more insular and starts erecting trade barriers and favoring domestic UK production. The majority of businesses will likely not suffer. But this reality aside, what we saw were massive falls in the value on markets and stocks that in many instances have only a peripheral concern with the UK.

The only certainty is that there will be uncertainty

For any investor with a long history in the market, these types of market shocks eventually become things that one can ignore and move past. The past couple of decades has been littered with a string of these market events, including the collapse of LTCM (the hedge fund), the Asian currency crisis, the twin tower attacks, the US recession, the GFC (I don't think I'll ever forget that one), and now Brexit can be added to this list. The only thing that you can say for sure is that these events will continue to occur as sure as the sun rises. Generally, and to date at least, the world just continues on.

Diversification globally and across industry is important

This event just reinforced in my mind the dangers of a concentrated portfolio. If I had a portfolio chock full of UK banks or UK airlines, I'd be real concerned about this event on the long-term prosperity of my holdings. These banks may have capital controls imposed on them. They may not be able to tap European funding sources for access to capital. Airlines may have restricted access to other European markets. Who knows what rules the new government may want to put in place. It's super important to maintain a moderately diversified, global portfolio with large businesses that have access to global markets.

Regionalism a concern

The bigger concern for long-term investors is whether this marks the start of a more inward focused approach to economic growth, where countries look inwards and start erecting their own trade barriers and taking care of themselves first.

While there is no indication that is going to happen, various European economies may also look to exit the EU over time. Any barriers to free trade is an unwelcome development for a global investor. It just introduces friction for businesses, which impedes profitability and returns on equity. If you hold best of breed, the impacts are likely to be more limited as there are generally few businesses that can compete as effectively, even with some form of economic assistance.

However, artificial governmental assistance doesn't make for a level playing field, and this would be an unwelcome development if we start to see greater regionalization more broadly.