How the Brexit Vote May Affect Your Investments

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With the historic vote by the British people to exit the European Union (EU) now finally behind us, many investors have been left wondering why and how their portfolio’s may be effected.

First let’s deal with the why. Many people are still wondering how a decision by a single country of 65 million people can lead to some of the dire economic predictions we’ve been hearing for the past few months. While some of the gloom and doom predictions prior to the election may have been “hyped” up a bit to try and sway voters, there are many experts who fear the decision by Britain to leave the EU will have long lasting implications not only to the UK and Europe, but to the rest of the world as well.

While Great Britain is the 22nd most populous country in the world, it is the 5th largest economy. More importantly, it is the money center of not only Europe, but a large portion of the world as well. As such, it plays a critical role in facilitating the movement of money around the globe. As the vote to leave the EU starts to be implemented, many of the decades old treaties and agreements between Britain and the EU member countries have to be renegotiated.

One of the questions left to be answered is whether or not those European countries will harbor any resentment towards Great Britain when renegotiating those new agreements, and will it put the UK banks in a worse position? Some experts feel that this may benefit the German banks and financial institutions, and help Germany become a much stronger global financial center.

So how may this effect the average person in the U.S.? While the final chapter of this historic vote has not yet been written, there are things that we are observing very closely that may impact your investments and savings in the shorter term.

Here are a few observations:

Stock Market
As a result of Brexit, we will more than likely see continued and possibly increased volatility in the stock markets. The markets HATE uncertainty. When dealing with uncertainty the markets become more susceptible to emotional moves, fear being the most powerful motivator. We saw this on full display the two days following the vote when the market dropped almost 900 points. On the following three days the market was up over 800 points. We are likely to see additional periods of increased volatility continue as the consequences of Brexit unfold. The stock market has always been volatile, but at times it requires some additional intestinal fortitude!

Interest Rates
The angst being created in Europe due to Brexit is causing many investors and financial institutions such as banks, insurance companies and pension funds to seek safer havens for some of their assets. Historically one of the most reliable places to seek safety is in U.S. government bonds. This inflow of money into the U.S. has caused our already historically low interest rates to drop even further. This is also being exacerbated by the fact that several European countries have NEGATIVE interest rates! Many experts feel that as long as the uncertainty continues, interest rates in the U.S. will continue to be extremely low. This means that there is probably no short-term relief in sight for retirees and others who live on the interest from their savings.

Bonds
While dropping interest rates is bad news for savings accounts, it has been good for bonds. Interest rates and bond values move in opposite directions. So as interest rates have fallen recently, it has increased the value of many bonds. For the time being, certain bonds appear to be an alternative for riskier investments, as well as very low yielding accounts.

So What Does This Mean for Investors?
The bottom line for investors is pretty much what we have been saying for the past year or so—caution and patience. Currently there are plenty of things for the stock market to be concerned about. It wouldn’t take much to create a significant drop in the stock market. That being said, if an investor is properly positioned, a large drop in the market is not necessarily a bad thing. Stock market declines are also buying opportunities. The key is not being too heavily invested in stocks as they are going down, and then being emotionally prepared to buy when the opportunities present themselves.

As Thomas Paine said, “These are times that try men’s souls.” It’s a difficult time for investors, especially since fear and frustration seem to be the dominant emotions. Both can cause people to make regrettable decisions. There will be opportunities to make money, but we will most likely experience a lot of volatility. Remember—caution and patience!