Last Thursday’s Brexit vote was the most significant event in the postwar history of Britain.

And it turned the financial world upside down.

Global stock markets have sold off sharply on the news. The pound plunged more than 8% against the dollar Friday. (And it [was] down further [yesterday], hitting a 31-year low.)

[ad#Google Adsense 336×280-IA]The world’s fifth-largest economy will be leaving the 28-nation European Union.

And while that has been a distinct possibility since the referendum was introduced in February, the final tally took investors by surprise.

It shouldn’t have.

As political columnist George Will noted a few weeks ago, “The EU has a flag no one salutes, an anthem no one sings, a president no one can name,” a sclerotic bureaucracy that no one admires, “a currency that presupposes what neither does nor should exist (a European central government), and rules of fiscal behavior that few if any members obey and none have been penalized for ignoring.”

Pundits say the “Leave” vote was a complete shocker. I don’t think so.

Don’t get me wrong. There are distinct advantages for members in the bloc. A single market for trade in goods and services – encompassing more than 500 million people – reduces tariffs and other frictions, spurring both competition and efficiency.

But EU membership also entails a significant surrender of national autonomy that is understandably unpopular.

Brussels has its tentacles in virtually every aspect of members’ lives, including immigration. Its burdensome regulations affected nearly 70% of the British government’s actions.

The “Leave” vote – and subsequent resignation announcement by Prime Minister David Cameron – has left the country politically divided and in uncharted territory on multiple fronts.

For starters, citizens of Scotland and Northern Ireland voted to stay in the union. This gives fresh energy to separatist groups, potentially undermining the future of the United Kingdom itself.

It also forces the EU to deal with broad discontent throughout its remaining member nations. Many citizens of the Netherlands, France, Spain, Portugal and Italy are making similar rumblings. In this sense, the U.K. vote was a direct challenge to the EU’s viability.

A number of European financial institutions are at increasing risk. They just came through the shock of the financial crisis and Great Recession. With trillions in loans outstanding, they need firm currencies, solid economic growth and investor confidence.

None of those exists right now.

Some argue that a weak pound will improve Britain’s competitive position in the world. Yes, but Britain also needs to borrow from abroad to fund its day-to-day spending. A weak pound makes it tougher to repay these debts, adding to potential economic trouble for the country and its banks.

There are many, many ramifications here. But the bottom line is this: We’ve entered a period of profound political, economic and financial uncertainty.

That is precisely the kind of thing that markets hate.

Institutional investors will hold off making big decisions until events settle down and the future becomes clearer.

Short-term traders should resist the temptation to do something heroic here. Yes, trillions of dollars in shareholder wealth just went up in smoke. But to take advantage of a crisis, you don’t have to be the first one to the fire.

We are likely to see extreme volatility over the next few sessions. That means you could be absolutely right in the morning and completely wrong in the afternoon. (Or vice versa.)

There is a very real risk of getting whipsawed. Short-term traders should stand aside for now.

For long-term investors, however, it’s a bit different.

It will be more than two years before Britain actually leaves the EU. A lot can and will happen between now and then.

Investors – as opposed to traders – should think long term and ignore short-term market fluctuations.

Whenever emotions run high – as they are now – some securities get mispriced. That creates gifts.

The problem is that securities may be even further mispriced tomorrow or next week.

From a long-term perspective, this isn’t terribly important. But from a short-term trading perspective, it most definitely is.

Hence, this is a temporary red light for traders. But it is merely a flashing yellow one for long-term investors, since the multiyear market trend will almost certainly be higher.

No country has ever left the EU before. That means no one – absolutely no one – knows how this will play out. The more confident someone sounds in their predictions right now, the more you should discount their views.

Bear in mind, Britain has yet to notify the EU of its intentions and set the two-year clock ticking for negotiating its departure. Until it formally withdraws, Britain will retain all the rights and obligations of membership.

We’re in for a complicated and protracted sorting out process: politically, economically and financially. (There are even calls for a second referendum to determine the terms of an exit deal.)

Amidst all this, you can be sure that enticing investment opportunities will develop.

Coolheaded traders and investors will get plenty of chances to pick their spots in the weeks ahead.

As these situations materialize, we’ll point them out to you. Stay tuned…

Good investing,

Alex

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Source: Investment U