How the United Kingdom Leaving the EU Impacts Your Investments and Why You Should Pay Attention
Just as you thought you were making sense of the policies of candidates for U.S. president, there was a momentous vote in Britain on the topic of “Brexit.” Granted, the country is thousands of miles away, but the vote has an impact on the wealth and retirement plans of Americans (and other countries as well). Why? And what can you do about it?
What is Brexit?
If you didn’t know what Brexit was until now, you’re not alone. But it’s helpful to get up to speed about it. “Brexit” is a combination of Britain (“Br”) and “exit” – as in an exit from the European Union (EU). The United Kingdom held a vote that was a referendum (a simple “remain” vs. “leave” choice) on whether Britain would remain in the EU. The “leave” vote won, and world stock markets went into a tailspin the week following. The impact of the Brexit vote on the United States and across the world highlights just how intertwined the stock markets, business profitability, and economic stability of an individual country are with the rest of the world. A vote in any one country has the power to disrupt the course of politics and financial markets of many others.
What was Impacted?
- The U.S. stock market indices declined.
- U.S. government bond yields (interest rates) declined.
- Gold went up.
- The U.S. dollar strengthened against the British currency.
What will Happen Next?
The impact of the Brexit vote will continue to be felt on stock markets, financial institutions, corporations, and the economy – and therefore, on your personal wealth and retirement income. Britain actually leaving the E.U. does not take place immediately, but over two years. Currently, there is no agreement or plan on how Britain’s departure from the EU will be executed. Stock markets do not like uncertainty and respond with increased volatility (big price swings in either direction). Volatility in stock markets will continue as new actions are taken and developments unfold.
Some of the potential issues and uncertainties from Brexit that could sway markets:
- European debate on the timing of Britain’s departure from EU
- A possible second referendum by Scotland on its independence from the United Kingdom
- Further downgrade of Britain’s credit rating
- Central Bank intervention in currency markets
How Were Women Investors Specifically Impacted?
- In general, women tend to have better returns on their investments, because most are more risk-averse than men. Therefore, most buy and hold in volatile environments like this, which is a much better long-term strategy than trying to guess the market.
- Scientifically, women live longer and therefore need to invest incrementally to meet the need for more money due to a longer retirement – in practical terms, they need ten years longer in financial support during retirement than their male counterparts.
- Women business owners need to be mindful of the impact of Brexit, both on the prices for finished goods and the cost of raw material and labor. For example, in a strong dollar environment, the purchase of raw materials and labor in foreign markets will be lower — arguing for greater profit. But if a majority of sales are exports to foreign countries, the strong dollar may dampen sales, since the product is relatively more expensive, and people have less disposable income. However, there is a way to hedge and speculate on currency movements to eliminate risk and participate in profits. Women business owners who do so will, at a minimum, be protected from any adverse currency moves.
The Effects on Currency
- The change in the USD/GBP exchange rate is a bonus for international travel plans.
- The UK currency (GBP, £) dropped to a 30-year low as the USD strengthened. Today, it costs $1.36 USD to buy 1£, versus one month ago when the same 1 GBP cost $1.47.
- Thus, for Americans planning to travel to London this summer the change is positive – it will take fewer dollars to buy the same amount of British pounds. For example, a museum admission ticket which costs 15 GBP will cost $20.55, versus $22.05 one month ago – a savings of $1.50.
- For U.S. businesses counting on U.K. tourist to boost summer sales, the change is negative as it will take more British pounds to buy the same amount of dollars, likely to result in reduced spending. (This conclusion, of course, is dependent on prices staying constant and not being adjusted for the new exchange rate.)
- For Americans traveling to other countries in Europe, it is important to watch the USD/EURO exchange rate. The USD has strengthened appreciably against the EURO. Speak with your bank about the process for purchasing currency for travel abroad – and remember to consider any transaction fee when comparing rates.
What Should You Do?
- Don’t panic. Don’t rush and sell your investment holdings blindly, without careful consideration of your time horizon, risk tolerance, liquidity needs and overall portfolio and retirement savings.
- Expect continued volatility. Markets do not favor uncertainty. The consequence is increased volatility (wide swings in a stock’s price in either direction over a short period of time). The path the U.K.’s exit will take over the next two years is unknown, as is the impact on world economies. This uncertainty will result in sustained market volatility as politicians, reserve banks, corporates, financial entities, and investors react and reposition.
- Consult a financial professional, and get unbiased advice (i.e. from someone who does not have a vested interest in your acting one way or another, or from a fiduciary – i.e. someone who puts your interests first, and is not swayed by consideration of commissions or fees earned).
- 401(k) Matters: Check with your financial advisor on how Brexit may have affected your 401(k).
- Discuss all issues with your advisor, who is familiar with your personal time horizon, time until retirement, and need for liquidity. Consider the following with them:
- Does the market drop or the increased volatility require a modification to your financial plan, retirement spending budget, allocation of investments, and asset protection strategy?
- Does the drop present an opportunity to buy quality stocks at lower prices?
The answers will be different for everyone based on personal financial resources, needs and circumstances.6