The “Brexit” spawned headlines like the amusing “The British are Leaving, the British are Leaving!” Yet there is nothing funny about what happened to global financial markets today.
Much of the red ink splattered on trading floors is self-inflicted in that the markets bet wrong and simply assumed the average British citizen would go along with the current global financial order. The British citizens didn’t and it rocked the world. In many ways the screaming and panicky headlines are probably just an overreaction and carry more fear than humor across the internet and media world.
Now we’ve fielded a number of questions from Local 4 viewers today. Kathy Stilwell asked the most basic and important question:
“Can someone explain to me what is the European Union and the pros & cons of being in it?”
Well here goes. The European Union is a uniting of 28 [now 27] European nations who banded together starting back in 1945. Great Britain didn’t join until 1973. The idea was formed since Europe was so prone to bloody wars that they should unite and create a more stable economy. Over time they even came up with their own currency: the Euro. But as time went on, the EU became more and more bureaucratic and powerful. Some countries started feeling like the EU was making decisions on things like immigration policy and central banking that were not positives. Brexit means Britain wants to go it alone and feels it will better prosper as an individual economic power in the long run rather than being beholden to the big government solutions now guiding the EU. Now that Britain is gone, there is a rumbling across Europe that other countries like France and Spain will want to leave as well. For us, it means cheaper goods are to be found in Great Britain today. If you want to buy tea or make that holiday shopping trip to Harrods, now is the time. The Pound took a beating on the currency markets sinking to the lowest level since the 1980’s against the Dollar. But this could also plunge Britain into recession, which could easily spread what market analysts call “contagion” across Europe. Europe just rebounded from a nasty recession and the domestic auto companies took a lot of losses during that time which hurt their bottom lines.
Charles Tornow asked:
“Does the UK have any trade treaties of their own, or have they relied on the EU for the last 40+ years?”
Yes is the simple answer. That is likely to change. The Brexit will mean the EU will likely still want to do business with Britain and it will have to renegotiate side trade deals in order to keep an orderly market.
Prof. Rightmer asked:
”How will multinational companies suffer? Or will diversification shield them?”
A global marketplace means companies are diversified. If Europe goes into recession, the companies can go and grow elsewhere and make profits in China or the U.S. This is helpful. The problem comes if Brexit causes a global financial meltdown. You may recall it wasn’t so long ago Greece was threatening to default and there were predictions its collapse within the EU would mean global recession. That didn’t happen, and it’s more likely than not Brexit will not do so either.
Now diversification is a very good word to consider today as you wonder whether an entity that accounts for a minute fraction of one percent of American GDP can affect you directly. Chances are it won’t. But you did see your retirement funds, whether an IRA, a 401(k), 403(b) or 457 defined contribution plan take a nasty hit. These kinds of losses happen. But remember your accounts have plumped up rather nicely over the past five or six years and those gains are making you smile. Don’t panic and decide now is the time to get out of the market simply because the headlines are screaming as if investors’ hair was on fire. You need to monitor your accounts as a matter of course. You need to diversify your portfolio. That means not taking on too much risk by going all in to the stock market, especially if you are nearing retirement age. The older you are the more money you should be carving out into other investments, bonds, reit funds, gold or silver. You protect your growth by being in a number of different segments of the market so if one goes down precipitously, your other investments might go up. So, today stocks took a bloodbath. But gold went up smartly. So if you were in both, your losses, were minimized; pretty smart! One of the big mistakes investors make is not understanding true diversification. Let’s say you want to buy stocks like General Motors, Boeing and energy company Schlumberger. Guess what, they may be good long term companies that pay dividends. But they are also all in the transportation sector. If energy and transportation take a hit, so do you. You will want to get into say a high tech company like Intel and a financial stock like JP Morgan Chase as examples of other sectors. But to get more specific, I do not recommend individual stocks for the average investor. Way too risky. A good mutual fund or better yet Electronically Traded Funds are better, lower risk and often lower cost options for the very point that got us here: diversification. My best advice is to find a good fee only financial planner, buy a full financial plan [usually about $1500 or so]. Then get help constructing a good diversified portfolio. Protect yourself against days like today when events rock your financial world.
Brexit is likely to be more blip than blast. But let’s be prepared in case its contagion spreads.