Investors are no doubt on edge today as Britoners take to the polls to decide whether or not to leave or to stay in the European Union. We likely won't know the final result until around 4 a.m. London time, or 11 p.m. Eastern, but global markets will surely start reacting as results begin trickling in.
While markets have been doing a bit of a dance over the last week – up one day, down the next — if the vote does come back in favor of exiting the EU, then there is a good chance markets could see a more pronounced drop. Morgan Stanley said last week that European equities could fall by 15 percent within six months, while many others think that global stocks — regardless of country — will fall, too.
Americans will also be impacted. According to Lipper, 14.34 percent of U.S. mutual fund assets are in European stocks, while any investor with a well-diversified global portfolio is likely holding several U.K. and European-based companies.
If all of this volatility has you feeling anxious, and if you're specifically worried about a vote to leave the EU, there are still some portfolio-protecting moves you can make now.
The first steps? Reduce your exposure to European equities and increase your allocation to gold, said Bob Sewell, president and CEO of Bellwether Investment Management in Oakville, Ontario, Canada.
He thinks that a yes vote will hurt markets and that stocks could fall by 10 percent. As a result, he has lowered his exposure to Europe. In April he reduced those holdings by 5 percent and put that money into cash. He now has just a 15 percent allocation to the region.
Others are reducing their exposure, too. ETF.com reported today that investors pulled $11 billion out of the 10 largest European equity ETFs year to date through June 15.
"You have to look at your portfolio and see how much exposure you really have to Europe," he said. "A simple means of hedging would be to just reduce your overall exposure to the region to some degree."
Sewell also increased his exposure to gold, which historically tends to rise in volatile markets. The precious metal has indeed climbed significantly over the last six months: It's up 22 percent since December, likely because of worries over Brexit, he said.
A flight to safety
Generally, experts recommend a 5 percent allocation to gold, but Sewell said that investors might want to up that to 10 percent today.
Savvier investors could also use put options against individual stock positions, he said. This strategy would allow you to sell a stock at a certain price rather than see it fall indefinitely. It's insurance, and "it could make real sense in this environment," said Sewell. But it can also be expensive, so weigh the cost of that insurance against the potential downside risk.
Buy short-term, out-of-the-money options, which means buying an option with a strike price below the current price of the stock. Say Company A is trading $80 and you buy an option to sell it at $70 — that means it's $10 out-of-the-money. If the price falls to $70, the person you bought that option from will have to buy the stock at that lower price.
The more out-of-the-money the option is, the cheaper it is to buy. While these aren't dangerous for the option buyer — it's just insurance, said Sewell — the cost will depend on the strike price versus the target price, volatility in the market and how long you plan on holding the option for.
Investors should think about protecting themselves against a fall in the euro, too, which is likely to happen if a vote to leave the EU comes back. It's already dropped nearly 2 percent since early May. You can do that by buying currency-hedged exchange-traded funds — these funds are held in U.S. dollars — such as the WisdomTree Europe Hedged Equity Fund (HEDJ) or the Deutsche X-trackers MSCI Europe Hedged Equity ETF (DBEU), said Sewell.
Sam Stovall, managing director and U.S. equity strategist at S&P Global Market Intelligence, thinks that while investors can make some adjustments to "lighten" their exposure to Europe, people's focus should be on buying rather than selling.
European stocks are already an attractive buy, he said, with the S&P Euro 350 trading at 15.1 times earnings, compared to 17.7 for the S&P 500. It also has a 4.1 percent dividend yield, and the companies on the index are expected to see earnings increase, on average, by more than 50 percent in 2016.
"Europe, especially, looks very attractive from an international perspective," said Stovall.
Investors should start buying if markets fall by around 5 percent, he said, since it's "a meaningful decline that you can begin to take advantage of." What investors shouldn't do, though, is panic. "The best thing you can do is don't be your portfolio's worst enemy," said Stovall.
You have to look at your portfolio and see how much exposure you really have to Europe.Bob Sewell, president and CEOBellwether Investment Management
Sewell of Bellwether Investment Management admits that it's a difficult period in the markets right now — every day, stocks rise or fall based on a new Brexit poll or just on a feeling of a particular outcome, but at least he knows that he's protected.
He's holding enough European equities to benefit from a vote to stay in the EU — and a likely rise in the market — but he's also sold off enough that he doesn't think a vote to leave the EU will do damage to his portfolio.
Sewell is also looking for opportunities to get back in, which is why he's holding more cash, but, he said, he's not going to do anything drastic.
"By having more cash and reducing our exposure, we can be both defensive in the short term and have the ability to buy at lower prices should that outcome occur," Sewell said. "Our view, though, is to wait and let the dust settle a little before deploying any money."
— By Bryan Borzykowski, special to CNBC.com
