Fama and Booth Weigh In On Brexit

Fama and Booth Weigh In On Brexit
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.


Photo courtesy of Flickr.

When news of the Brexit vote broke, the financial media went into an overdrive of speculation bordering on hysteria. There was much talk about potentially devastating scenarios, including "turmoil" to global markets.

One investment "pro" counseled investors against buying stocks because "the Brexit selling is not over."

Investors may be understandably concerned about the uncertainty caused by the Brexit vote. Some may succumb to the steady drumbeat of anxiety-producing "advice" in the media and dump stocks.

On the day after the Brexit vote, with global markets plummeting, I was at the Austin, Texas, headquarters of Dimensional Fund Advisors. Dimensional is one of the most prestigious fund families in the world. It manages $409 billion in assets. It doesn't make predictions about the direction of the markets to select stocks or bonds. Instead, it bases its investment strategy on sound empirical research. Among the academics associated with the firm is Eugene Fama, a Nobel laureate in economics.

Dimensional was co-founded by David Booth, who is chairman of the firm and its co-chief executive officer. I interviewed him on June 24, and asked for his thoughts on how Brexit would affect Main Street investors.

He told me Dimensional was not reacting at all to the Brexit vote. He noted the markets were functioning normally, with all orders being handled routinely. He said the focus of the media was on selling and the market decline. But, of equal importance, was the fact that there were buyers on the other side of every trade. Clearly, many investors felt the decline presented a buying opportunity and that likely a large percentage of these buyers were institutional investors.

He said investors who were worried about short-term declines in the stock market shouldn't be holding equities. He mentioned that Eugene Fama had observed that if investors panicked and sold every time the market dropped by 3 percent or so, there would be "a lot of selling going on."

Dimensional believes that when investors exit the markets after declines they may miss the recoveries. Instead, it counsels investors to remain in well-diversified portfolios and notes that these investors have historically been rewarded over time.

Booth believes in the wisdom of the markets, and that expectations are incorporated into the prices of stocks and bonds. Dimensional does not attempt to second-guess the collective wisdom of millions of traders buying and selling stocks every day.

If you have a well-thought-out investment plan, you are in an asset allocation that is suitable for you. Your plan takes into consideration the fact that stocks will have periods of negative returns. Your high-quality bond funds or bond portfolios should mitigate the current and future volatility of the stock market.

If you don't have such a plan, instead of trying to time the markets, you should focus on retaining a registered investment advisor who will prepare one.

Full disclosure: Buckingham (with whom I am affiliated) recommends Dimensional funds in the construction of client portfolios.

Dan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and his latest, The Smartest Sales Book You'll Ever Read. He is a wealth advisor with Buckingham and the Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.

Popular in the Community