The Brexit curveball

The Brexit vote shows that unexpected events happen more often than they're supposed to, and that you should structure your portfolio accordingly.

Like most, I was surprised by Brexit, as I assumed the British would ultimately vote for the status quo.

Much of the subsequent commentary reminds me of Bertolt Brecht’s poem that concludes: ‘Would it not be easier…for the government to dissolve the people and elect another?’ but let’s consider some implications for investing.

Firstly, all the experts were wrong. Again. Most economic commentators really can’t predict the future so you shouldn't buy or sell stocks based on macroeconomic forecasts. As John Kenneth Galbraith said, ‘There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know’.

Instead, concentrate on a company’s prospects, its competition, management, financials and so on. This allows you to take advantage when markets react to perceived macroeconomic calamities, as we suggested in Brexit Buy list.

Many Bremain supporters couldn’t fathom how anyone would want to leave the EU and just dismissed such people as irrational or worse without considering they might have good reasons for their views.

Respectfully considering different opinions – even if you believe they are wrong – makes for good citizens and also for good investing. When you buy a stock, someone else is selling it so consider why they might be doing so.

Even if you subsequently conclude your investment case remains valid, it’s still worthwhile considering the consequences if it isn’t. This relates not only to individual stocks in your portfolio but to your portfolio as a whole.

If 10% of your portfolio is invested in, say, CBA (ASX:CBA) but the other 90% is invested in a diversified portfolio of non-banking and non-financial stocks in different industries, then you’ll likely lose around 10% if CBA goes under (an admittedly unlikely outcome at present).

However, if you instead also have 10% holdings in Westpac (ASX:WBC), NAB (ASX:NAB) and ANZ (ASX:ANZ) – perhaps because you desire their fully-franked dividends – then your portfolio isn't diversified. This is because at least 40% of your portfolio is dependent on Australian economic and credit growth and, in particular, the state of the Australian housing market.

Ultimately, Brexit shows that unexpected events happen and they tend to happen more often than statistical analysis suggests. It’s the outcomes you don’t – or won’t – consider that often have the biggest impact on your investments.