The time you spent worrying about your savings vanishing after British voters decided to leave the European Union a couple of weeks ago may seem silly now.
The stock market lost $3 trillion and has regained almost all that was lost. And, if you look at your 401(k) or individual retirement account (IRA) statements, which should be arriving now for the second quarter, you will probably be relieved.
The Dow Jones industrial average has gained about 3 percent for the first half of 2016, and that includes the Brexit spasms that threatened to inflict awful losses. Although you may see some losses in some of your mutual funds, the destruction has been mild compared to what you might have imagined as the Dow dropped about 900 points during only two days after the June 23 vote.
The average mutual fund that picks large U.S. company stocks expected to be fast-growers lost about 2.45 percent during the first half of this year through the end of June, according to Lipper. But people who weren’t after the fast-growers and simply picked mutual funds that select a blend of the largest companies in the U.S. earned 2.2 percent on average.
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Of course, that’s not a delightful outcome compared to the historical averages for the stock market. The average annual gain is about 10 percent, and only six months remain this year to get anywhere near that. Analysts, meanwhile, are tamping down expectations. Goldman Sachs analyst David Kostin expects the Standard & Poor’s 500 index, which is one measure of the stock market, to fall 5 to 10 percent at some point during the next few months. Yet, by year-end he anticipates a rebound to 2,100. That’s just slightly below Friday’s 2,129.
In other words, the initial Brexit panic has subsided, but investors are likely to second-guess themselves in the months ahead as they get a look at the economic and political fallout from Britain’s historic decision.
So, should you return again to the fretting, or are there lessons to be learned?
One lesson after the tumult in the market should be that responding to either stock market panics or analyst forecasts can be folly. Investors who ran for the exits during the 900-point panic are kicking themselves now because they weren’t able to recover as investors decided they’d overreacted. But forecasts – either positive or negative for the stock market – can also be unreliable. Remember, almost no analysts saw the Brexit vote coming. The reason the stock market responded so violently was because professional investors were caught by surprise and reacted by selling stocks.
Rather than making knee-jerk moves during scary moments, Morningstar’s Director of Mutual Fund Research Russel Kinnel suggests heeding the words of Vanguard founder Jack Bogle. When your gut tells you to respond to your stock market fears by making a move, Bogle’s advice is to tell yourself: “Don’t just do something, sit there!”
One reassuring lesson coming from the Brexit panic is that bonds did just what they are supposed to do: protect your 401(k) and IRA when the stock market turns cruel. When you mix bonds and stocks together in your investment portfolios, the bonds cushion the blows stocks inflict from time to time without warning.
Bonds have been the heroes of the year – gracing portfolios with sizable gains even though analysts early this year warned people that bonds were likely to become losers.
The average bond fund that invests in bonds that won’t mature for 20 years or more gave investors gains of more than 12 percent for the first half of the year, according to Morningstar.
This unusual gain won’t always occur. U.S. government bonds have been popular lately throughout the world because investors are worried about economies in Europe and Asia and can get interest rates higher in the U.S. than in many other countries, even though 10-year U.S. Treasuries have been yielding just 1.4 percent – almost a record low.
When the global economy appears stronger and the Federal Reserve raises interest rates, U.S. government bonds won’t be as appealing. But the lesson from Brexit is to keep holding some bonds even when you can’t stand their lowly interest rates because you never know when a scary plunge in the stock market will creep up on you.