The U.K. Returns to Being an Island

Last week we had the referendum heard round the world. Voters in the United Kingdom turned their backs on the Continent after 43 years.

Investors worldwide were fearful and fled equities in droves. In two days the Dow Jones Industrial Average fell 871 points.

And then a strange thing happened. Investors decided that perhaps the sky was not falling after all. Counting a one day run up before the vote, in just four trading days, the Dow had nearly returned to its level of the week before. By the fifth day, it was actually 100 points higher.

This is yet another lesson that investors should not react rashly to emotional events. In the short run, markets are highly unpredictable. Study after study going back a century has shown that investors are likely to hurt themselves by quickly reacting to events and trading emotionally.

The research firm Dalbar has shown that current investors receive about one-third of the return of the mutual funds they invest in because they make ill-timed moves in and out.

It feels uncomfortable to sit there and do nothing while the world is falling apart. But do it anyway. Your wallet will thank you.

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