The British have chosen to leave the Europe Union, and markets fell hard on Friday as a result. The Dow Jones Industrial Average fell by 610 points or 3.4%, the largest single day drop in 10 months. The NASDAQ index fell by 4%, and currency markets across the world were a mess.
But just because the markets are falling does not mean the sky is. The Brexit is not going to lead to the total collapse of the EU nor World War 3. It may not even lead to a Donald Trump victory in the U.S. presidential election, even though the Brexit victory is a win for the nationalist, populist forces of which Trump is an important leader.
The best thing that any American investor can do is to borrow that British stiff upper lip and do not panic sell. I cannot emphasize that enough. There are many things that U.S. investors should think about over these next few weeks, but if there is a single thing you take away from this article, do not act like the Brexit signifies the end of our economic system.
So what are some of the other things? Here are three big thoughts on what to do and not do.
1. Do not sell stocks
The worst thing that any investor can do right now is to panic sell. Yes, the DJIA and NASDAQ fell by a lot. But this does not even come close to the truly disastrous days at the stock market that heralded the beginning of a recession.
There is no guarantee that a Brexit will create a recession in the United States. Britain is just the seventh largest trading partner with the United States, and far behind Canada, Mexico, and China. One economic scenario forecasts that a Brexit will cause U.S. GDP to decrease by 0.4%. While that is damaging, it is not at the level of a recession.
So there is no reason to assume the worst and panic sell.
2. Do not buy stocks
One thought that investors may have is that if investors panic sell, then this is a good chance to buy stocks at a low price for when the economy turns around.
But there is no guarantee the economy will turn around anytime soon. The Brexit may not quite have the impact on the U.S. economy which some might think it does, but it will have a negative impact. And most importantly, it adds instability in an economy which already has plenty of instability with the U.S. presidential election and the (unlikely) possibility of a Federal Reserve rate raise.
The best move that any investor can do now is to stay calm, wait, diversify assets, and ride out the current turmoil.
3. Do not buy gold
While the worst thing any investor can do in the aftermath of the Brexit is to assume the worst and panic sell, the second worst thing is to assume the worst and start going for the "safe investment" of gold. But panicky investors are doing just that, raising the stocks of gold mining companies while also propelling gold itself to a two-year high.
In fact, gold is almost always a bad investment, and Brexit does not change this. If you invested $1 in gold 30 years ago, you would have around $1.78 today adjusting for inflation. If you decided to do it 80 years, you would have $2.20.
As Warren Buffett observes, almost no one invests in gold. People speculate in gold, gambling that the price will go up independent of its highly limited productive value. And if you want to speculate, I suggest taking a weekend in Vegas. At least you will get some entertainment for your money.
Keep watching the Brexit political saga
Even though "Leave" may have prevailed at the polls, that does not actually guarantee that Britain will leave. It is obviously likely to happen, but Britain and the EU will have to negotiate the terms of the departure.
There is a lot that could happen here. Some European officials have suggested that Europe should take a hard line towards Britain and show what happens to countries that leave. But if Europe does that, it could scare countries like Greece, Portugal, and Spain out the door as well. And at the same time, there is the possibility that British voters may choose to stay after facing economic hardships as a result of departure.
The Brexit is destabilizing for the U.S. and world economy, but how much so depends on how these negotiations go. If Britain can be persuaded to stay or the transition goes smoothly, then that is a good sign. But if the relationship between the two sides cracks, that will further destabilize the global economy, and investors should look at safe investments such as bonds.
See full Brexit coverage here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.