Why it's too late to panic about 'Brexit'

If you didn't panic sell out of your European stocks already, you're too late. Building a "Brexit" portfolio now isn't going to add any clarity to a world that's been thrown into economic confusion.

The United Kingdom's decision to withdraw from the European Union caught most investors completely offguard, sending stocks down 3.4% Friday and erasing 2016 gains. But designing a portfolio that's positioned to take advantage of this new world order doesn't jive since prices already have been taken down to reflect the new reality and it's uncertain at this point how this will play out.

"Markets have gone from 'hope for the best' to 'plan for the worst," says Rod Smyth at Riverfront Investment Group. "It will continue and we will not have clarity for a long time." During times of market upheaval, investors routinely feel like they need to do something. But that's why it's important to remember these strategies when positioning portfolios:

* Don't read too much into the initial reaction. There's no question that market's reaction on Friday is a stunning one. The Dow Jones industrial average sank more than 600 points putting the average below where it was when the year started. Financial stocks as well as airlines and car-parts stocks were hurt the most, some dropping more than 7.5% on the news. But this isn't necessarily a harbinger of trouble, but more of the market pricing in the reality of Brexit that many thought was not going to happen, Smyth says. "A well-thought out and balanced portfolio is designed to withstand things like this," he says. "Long-term investors need not worry, but tactical investors need to know something material has changed."

* Don't let news steer your your portfolio. Long-term returns of stocks aren't determined by news events like Brexit, but are set by the prices paid by investors, says Mark Hebner, president of money management firm Index Fund Advisors. European stock prices are lower showing how greater uncertainty is priced in, he says. "The more uncertain the investment, the lower the price," Hebner says. Investors need to remain diversified and keep their eye on long-term expected returns, a strategy that will be more profitable than guessing about the future, Hebner says. The IFA International Value index, which includes beat-up European stocks, has generated average annual returns of 9.3% since 1928. Even a moderate portfolio, that's 40% in bonds, should have 12% exposure to international stocks, IFA says.

* Find the strength and own it. Nervous investors should be sure they own stocks that are holding up amid the disruption. Utilities like Consolidated Edison (ED), CMS Energy (CMS) as well as defensive stocks like tobacco firm Altria (MO) and real-estate investment trusts like Realty Income (O) were among the stocks in the Standard & Poor's 500 that gained Friday. A diversified portfolio needs to include stocks like these to counteract pain elsewhere.

* Don't overreact. U.S. stocks were already fully valued, so the fact they're selling off now on the Brexit news isn't all that alarming or indicative of the future, says Todd Morgan, chairman of investment firm Bel Air Investment Advisors. The S&P 500 was trading for 21.4 times its earnings over the past 12 months the day before the vote, which was pricey compared with the market's average P-E of 19 since 1988. Selling into the market now that it's cheaper wouldn't be wise, he says. "The market was fully valued. The market needs time to digest this," he says.