Why Brexit should matter to you
Q. What does all this talk of England and the EU really mean for me?
A. It’s all about uncertainty. The stock markets hate uncertainty.
Britain’s decision to leave the European Union (EU) came as a big surprise to global markets, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.
He said as dramatic as the market’s declines were, these declines simply bring domestic markets to the levels they were trading at just a few weeks ago when Brexit fears last peaked, and they’re still above the February 2016 lows.
Power said other “safe” assets, such as U.S. Treasuries, the Japanese yen and gold have all rallied. International markets are getting hit just as hard and, in some cases, harder than domestic markets.
So, why are investors so concerned?
“While there will be economic disruptions over the next 24 to 36 months as Britain and the EU unwind their current arrangement, what investors really fear is that the United Kingdom vote will lead to other countries voting to leave the EU as well,” Power said. “It is this uncertainty that has caused investors to reconsider the opinions they held about asset valuations just a day or two ago.”
To top things off, Power said, we have our own big election coming up this November.
Of course, this type of uncertainty damages investor confidence, which can lead to further drops in asset valuations and an increase in market volatility, Power said.
The fact is we live in uncertain times and no one can predict what will happen next.
That’s why it’s so important to have a strategy that can adapt to changing markets.
“Our research has been pointing toward weaker foreign currency and international marketsfor a while now,” he said. “In fact, we hold no foreign currency exposure and very little to nointernational equity exposure in any of our growth oriented portfolios.”
Instead, Power said, he is overweighted in domestic equity, but much of that overweight is invested in lower volatility exchange-traded funds, or ETFs, which have a tendency to fall less when markets decline.
Knee-jerk reactions to unexpected volatility is never a good idea, Power said.
“Since political and economic uncertainty along with market volatility will continue for the foreseeable future, be sure your portfolio’s volatility profile is in line with your psychological tolerance as well as your financial needs, with the former taking precedence over the latter,” Power said.