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What should an investor do if the Brexit vote goes through?

With the so-called Brexit vote happening on Thursday, many U.S. investors are beginning to question what a possible U.K. exit from the European Union means for their retirement savings and investments. Polls show the vote will be close, so it's really anyone's guess as to what the results will be.

We have all witnessed substantial global upheaval, and many of us have had a window seat to watch how investors respond to uncertainty and turmoil. For far too many, their responses have not been good for their portfolios.

Brexit supporters with signs in London, June 15, 2016
Stefan Wermuth | Reuters
Brexit supporters with signs in London, June 15, 2016

Investors, and the financial markets they're involved in, don't like uncertainty. Why? Because it's extremely difficult to try to predict the future. If the majority of the Brits who head to the polls decide to stay a part of the EU, then nothing will have really changed and the financial models that investors have built will remain intact.

But what if most decide they'd rather have a future without the security of the EU? What then? Well, that creates uncertainty.

For instance, what will happen to all of the trade deals that are in place? What impact would this have on corporate profits? What about the bond markets, or the debt that is tied to the European Central Bank? Long term, will other EU countries follow Britain's example? The list of questions goes on and on.

So what should you be doing to protect your life savings from the Brexit vote? Actually, you probably shouldn't be doing much at all. If you are properly diversified, with a majority of your securities in the U.S. markets — and with limited exposure to any one country — you should probably sit tight for now.

Conversely, if you've been placing some speculative bets or have been overweighted in European securities, you might want to seriously reconsider your strategy prior to the outcome of Thursday's vote.

That said, if the majority of British citizens vote to remain part of the EU, there may be a few days of increased volatility with the markets, but because nothing will have really changed, whatever volatility may occur will probably be short-lived. The EU will remain intact, and there won't be a lot of uncertainty added to the mix.

"Many of the worst investment mistakes I've seen have originated from an overreaction to the unknown. It has always been my philosophy that slow and steady wins the day."

On the other hand, if the vote results in an exit from the EU, this could present a much different story with the financial markets. A great deal of uncertainty would suddenly be thrust upon us, and with it, I would expect major volatility and some price dislocations in the European markets — particularly in fixed income.

Many of the worst investment mistakes I've seen have originated from an overreaction to the unknown. It has always been my philosophy that slow and steady wins the day, and that philosophy applies whether Britain leaves the EU or stays for the duration.

Here is a four-point strategy to help investors navigate a Brexit win:

  1. Don't react by selling anything. To be sure, there will be some fear in the European markets, but this would not be a good time to react to that fear. This is an emotional component of behavioral finance, and history has shown that those investors who sell in the midst of a crisis usually end up doing so at the wrong time. They wind up selling low and buying high.
  2. Look for buying opportunities. The best time to purchase things on sale is when nobody else wants them. There may be some tremendous opportunities to purchase distressed assets, because many investors have given into fear and are running scared.
  3. Analyze how much of your portfolio is at risk. Most investors don't have all of their portfolio in risky assets. Figure out how much of your portfolio is actually tied to risky areas and how much is reasonably safe. Odds are, if you are a well-diversified investor, you don't have a high percentage of your portfolio tied to the European financial markets.
  4. Relax. We've experienced changes before, and sure enough, we will see more changes in the future. Most cannot be predicted. While changes of this magnitude can be worrisome, I urge you to fight through your fear.

Simply put, no matter how Thursday's vote unfolds, a well-diversified portfolio should protect you from most of the worst aspects of any volatility we may experience.

— By Scott Hanson, co-CEO of Hanson McClain Advisors