The next week is set to be a hugely important period for the UK economy. Whether you think remaining in or leaving the EU is the right thing, the outcome of the referendum is likely to impact on the lives of everyone in the UK and in the EU.
In terms of investing, a vote to leave the EU is likely to cause a degree of panic and fear among investors. That’s simply because Brexit would cause the outlook for the UK and Europe to be more uncertain than it already is, which could cause investor sentiment to come under a degree of pressure. As such, a relatively high degree of volatility seems likely, which has the potential to cause investors to panic to an even greater extent since short-term losses could be on the cards.
Clearly, dealing with such a situation is never easy and it can cause even the most experienced investors to lose their cool. However, such times represent opportunities as well as difficult periods, since they can often present the chance to buy high quality stocks for the long term at rather appealing share prices.
For example, during the credit crunch the FTSE 100 collapsed to around 3,500 points at its lowest ebb, but within six years had doubled to over 7,000 points. Similarly, the index recovered from the dot.com bubble and from 9/11, while other crises such as the 1987 crash and the oil shock from the 1970s hurt most investors in the short run but provided opportunities for long-term investors to go out hunting for bargains.
That’s not to say that the FTSE 100 will necessarily fall by an amount that puts it on the same scale as one of those crises should Britain vote to leave the EU. However, the fear, panic and volatility that were present during those periods could resurface since would be a step into the unknown for Britain.
Keep your head
During such periods, it can prove difficult to keep your head. That’s natural, since all humans tend to be ruled by emotion. However, this offers little help when investing as it can cause even the most intelligent investors to buy when the future looks brightest and sell when it looks bleakest. And as history shows, this can lead to major losses in the long run.
As such, focusing on the facts and the long-term outlook can prove to be useful during times of great uncertainty. Normally, selecting companies that have sound balance sheets, modest debts, strong cash flow, a high degree of diversification and that trade at a reasonable valuation is the most logical approach to take when investing. Periods of high volatility are no different.
Therefore, while the next week may be dreaded by some investors who may see it as having the potential to cause them significant losses in the short run, for long-term investors with a pile of cash, it could be a rather interesting week.