On June 23th, 2016, Britain passed the Referendum of the United Kingdom’s membership of the European Union and voted to leave the EU.
After reading about the potential impact of the UK leaving the EU and through a lot of chatter at work (I work in investments), I had been cautioned about the potential for increased financial market volatility for some time. The immediate shock of the “leave” decision would likely cause it to spike, particularly in the UK and European markets. Brexit would open uncertainty in the UK and my investments would be affected in the short to medium term.
- International equities are likely to decline, particularly in the UK and Europe
- The British pound and euro are likely to weaken
- Safe-haven assets such as the U.S. dollar, Japanese Yen, U.S. Treasuries, and gold are all likely to strengthen
Knowing all these possibilities, what did I change in my investment strategy?
Even after the vote was in and I saw the U.S. market fall three and a half percent Friday and again, another three percent on Monday, I did not change my investments whatsoever. On the global side, markets fell about twice as much and even that did not make me flinch.
Friday’s selloff had wiped out $2.08 trillion from global equity markets – the biggest one-day loss ever, according to Standard & Poor’s Dow Jones Indices.
As a strong saver still in the accumulation phase, I would be delighted to have the opportunity to buy in the market at lower valuations. Given the fact that I am currently a buyer and do not plan to sell within this decade, a market crash would be a great thing for my future financial independence.
A stock market crash in the beginning of the accumulation phase can be greatly beneficial to high savers once the market recovers. Daily ups and downs should not affect your long-term decisions and the best tip I can give you is to look at your balances the least often as possible. Once a year, only when comes time to rebalance your portfolio, if possible.
In addition, daily movements are unpredictable and can be very volatile. They will only represent minor dimples on the long-term. If you think that you would be too susceptible to news events or daily swings, I suggest you automate your savings and simply forget about it. The best thing to do once your investments are automated is to let them alone and do nothing.
No one knows where it will go. Source: Yahoo Finance
Brexit and international investing
As I mentioned in my Open Book series, I invest roughly 15% of my portfolio into the Vanguard Total International Stock ETF (VTI). With global markets dropping like a stone, I could see the dollars evaporate faster than hot British tea. The selloff has spread over globally. Japan’s Nikkei 225 tumbled 7.9%. South Korea’s Kospi and Australia’s ASX All Ordinaries both fell 3%. Germany’s DAX tumbled 6% along with the broader pan-European Stoxx 600 index.
However, I stayed calm and actually increased my position by buying even more VTI on Tuesday. I think that Brexit did grow the uncertainty in the European markets with fears of other countries following Britain’s example and/or new countries wanting to join the EU but market drops are healthy for investors.
Scotland’s First Minister Nicola Sturgeon said in the wake of the Leave result that it is “democratically unacceptable” that Scotland faces being taken out of the EU when it voted to Remain. A second independence referendum for the country is now “highly likely”, she has said. – BBC
Rollercoaster Money! Source: Yahoo Finance
With all the uncertainty in the air, investors are right to be cautious. Imagine how this will that affect businesses. Any multi-national company that has production in the UK might face tariffs or new taxes to export their products and companies that employ workers from the UK might lose that talent due to Visas or other restrictions. I think that this is much more than the little 2-day dip we have seen this week. The international markets might see a very rough year but again, I am perfectly fine with that and you should be too. 🙂
It [Brexit] will hit growth, as firms hold back on investment,and households increase precautionary savings. Longer term, we expect a less open and more volatile economy, with reduced inflows of capital and labour,and a lower rate of potential growth. – Jacob Nell, Morgan Stanley’s UK economist.
Brexit and the traveller
This might not apply to everyone but if you are like me and travel every year, you might benefit from the unrest in Britain. As one of the historical beauty of [ex]Europe, the UK is certainly a country on my travel bucket list. This wonderful country might become cheaper to visit in the near future (or might also become more expensive). Friday’s 8% drop of the sterling will certainly help with the currency exchange needed to travel but Brexit might lower the sterling even lower in the near future.
Investment bank Goldman Sachs predicted that a vote to leave the EU could hit sterling by as much as 20 per cent, with the pound dipping as low as $1.15 against the dollar and €1.05 against the euro. – Goldman Sachs.
With the pound lower, the cost of the stay will be lower but the airfare to get there might also be affected by Brexit. EU’s removal of the old bilateral restrictions on air service agreements and the introduction of more open competition on routes between Union countries lowered the European airfares considerably but the UK now has the power to vote on their own restrictions and agreements. Even international travel to and from the UK could be lowered depending on the agreements.
For reward points travellers like me, all these changes still affect the total cost of travelling. Even if you can benefit from free airfare and hotels through reward points, the general cost per day of the stay could greatly decrease if the pound drops.
In conclusion, I think that Brexit can be great for savers and travellers alike. I hope the best for this beautiful country! Xyz.