Should I stay out of the FTSE 100 until after Brexit?
It’s been a year to forget for many stock market investors. The FTSE 100 is down by 11% so far, and a number of popular big-cap stocks are down by more than 30%.
Things could soon get worse. Reports on Monday revealed that Prime Minister Theresa May has postponed today’s planned Brexit vote in Parliament. Also on Monday, the European Court of Justice ruled that Britain can reverse its decision to leave the EU.
This isn’t the place for a political debate, but it’s clear that Brexit could still take many forms — and might not even happen at all. Markets hate this kind of uncertainty, and many of the shares in my own portfolio have already fallen sharply.
If Brexit goes badly and triggers a 2008-style meltdown, then selectively selling some of my shares today might make sense. Personally, I don’t think that’s very likely. Here are three reasons why I won’t be selling stocks ahead of Brexit.
1. Not a global problem
From what I can see, the only companies likely to be seriously affected by Brexit are some UK domestic businesses and those European firms which trade across the UK-EU border.
Although some companies may face specific problems, history suggests that most will find solutions and recover over time.
In my view, international FTSE 100 firms such as Royal Dutch Shell, British American Tobacco and Diageo are unlikely to be directly affected by Brexit. So any sell-off could be a buying opportunity, assuming the global economy remains stable.
2. Avoiding cash losses
If I sold stocks today, then my existing paper losses would become real cash losses.
Timing the market reaction to political events is very difficult, if not impossible. But I’m confident that at some point, the market will probably start to recover. When that happens, things could change fast. Markets always look forward and big-cap stocks tend to react very quickly to economic news.
If I wait to buy until I’m sure that market sentiment is improving, I’ll probably miss out on most of the recovery. I could end up paying extra to buy back shares I’d sold previously.
3. I don’t want to sell
My final point is that I’ve no real desire to sell. I own shares in companies I think will prosper in the future. The vast majority of these firms pay regular dividends which I’ll continue to receive over the next year, regardless of the outcome of Brexit.
By selling today I’d miss out on this future income, which makes a significant difference to my annual returns.
Be greedy when others are fearful
I’m going to finish this piece with a quote from US billionaire Warren Buffett, who made a lot of money investing in US stocks in the aftermath of the 2008 crisis. Discussing his decision in a New York Times article at the time, Mr Buffett said: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful”.
That’s why I intend to continue buying shares in good British businesses, regardless of what happens to the UK’s Brexit deal.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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