How Should Investors Respond to “Brexit”?
By Sarah Cecil
As you know by now, the United Kingdom (U.K.) has voted to leave the European Union. The “Brexit” vote is expected to have major implications for Britain’s trade and economic relationships – but how might it affect you, as an individual investor?
At first glance, you might be worried. After all, right after the results came in, we saw a sharp decline in stock markets around the world, including here in the United States. And we may well see more volatility in the near term. But by taking a step back and looking at the big picture, you might see that the outlook for investors is nowhere near as gloomy as you may have thought.
Here are some suggestions for maintaining your perspective:
• Be patient. Despite the Brexit vote, it’s not so simple for the U.K. to just pack its bags and bid “adieu” to the European Union. In fact, it may take three or more years before the U.K. actually departs. This extended time period can give financial markets a chance to absorb the new reality – while giving investors time to ponder their long-term strategy.
• Don’t forget about the “fundamentals.” Financial markets dislike uncertainty, which is why they fell so sharply after Brexit. But the markets move much faster than the fundamentals that actually drive stock prices – and, despite Brexit, these fundamentals remain generally positive. In the U.S., economic growth is expected to continue in the 2%–2.5% range, and the prospects of a recession remain small. U.S. companies will continue to operate in Britain as before, and British companies will still participate in the global economy.
• Review your investment portfolio – and look for opportunities. If you’ve done a good job of building a diversified portfolio that’s based on your individual needs, goals, risk tolerance and time horizon, you may not need to take any action in the immediate aftermath of Brexit. Diversification is especially important, because it’s possible that some financial assets may be more negatively affected by Brexit than others; you can blunt this impact by owning a wide range of investments. (Keep in mind, though, that while diversification can ease the effects of volatility, it can’t guarantee profits or protect against all losses.) As you review your holdings, you may even want to consider adding international and U.S. stocks, if appropriate for your situation, to take advantage of the drop in price of many quality companies. As always, of course, be aware that the value of your shares will fluctuate and you may lose principal. Also, international investing does carry some special risks, mostly related to currency fluctuations and foreign political and economic events.
• Keep your focus on the long term. If Brexit-inspired volatility does go on for a while, keep your focus on your long-term financial goals, which have not changed. By staying focused on the “far horizon,” so to speak, you’ll be less tempted to make short-term moves that may not be in your best interest.
The Brexit vote may not be a positive development for the global economy. But we’ve gotten past bigger events in the past, including wars and other political crises, and we’ll get through this one, too. As the British themselves famously posted on their walls during World War II, “Keep Calm and Carry On.” That’s good advice for investors, too.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.