So Britain decided to leave the EU after the overly anticipated Brexit vote. It certainly sent global stock markets into such a tantrum, I'm sure would have made your two year old look good. Now how does this relate to a 401k or investment account? First let’s go over why the markets reacted the way they did, knowing there was a fifty-fifty chance of a Brexit vote. All week, the markets were pricing in a Bremain, or Britain staying in the European Union. What does it mean to "price in" a certain scenario? Well if the markets want something to happen, and there is a chance of that coming to fruition, then the markets rally. This is what we saw all week leading up to the vote. So when the vote came in for them to leave, it was a shock to the markets, similar to when your husband blindsides you with your in laws coming to stay for a month. At first, you're furious for no heads up warning, then you panic because you have to clean the house and run errands. All the while, your husband says it's no big deal, the house can be dirty.
So now that they did vote to leave the union, a two year divorce will take place between Britain and the European Union. They need to get new trade agreements in place and unwind the agreements they currently have. This will be a slow process and might continue to shake the markets, especially the European markets. The next concern on people's mind is which country will be next? Scotland just voted to stay in the union, but they already seem ready for another vote. Will Britain leaving open the gates for more countries to leave?
Since we don't know the answer to that question, how can we address what has already happened and try to preserve our portfolios with what we know? Non-US equities have been hit more than US equities so far, and seems as though that may will continue. If an investor is uncomfortable with that much risk, one option is to move out of international equities and into US equities or even into bonds or cash. This is just general information and not a solicitation to buy or sell in your own account. As Britain and the EU continue to work this out, again think the long and frustrating divorce process, there will continue to be more volatility.
Remember your time frame for your investments and financial goals. If time is on your side, this is a small and temporary impact on your portfolio. The markets can't go up forever, and pullbacks like these are healthy, as painful as they can be. They can bring good potential buying opportunities down the road. Just like when you're waiting for that designer handbag to go on sale. Stocks go on sale too; it just depends on how low that sale goes. During these times, it is important to be patient and talk to a financial advisor about any concerns and some strategies going forward for your portfolio.
Jessica Weaver, CFP®, CDFA™, CFS®
54 Grove Street Suite 2A
Somerville, NJ 08876
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