Broker Check

Brexit and your 401(k)

June 28, 2016

After the News of the United Kingdom (UK) leaving the European Union (EU) on Friday the 24th the Dow Jones Industrial Average (Dow) and other Equity markets around the world fell quite dramatically in comparison to an average day.  The weekend went by and lots of talking heads got to give you their opinion of what happened and what will happen in the days and years ahead.  The important thing for you is most likely how this will affect your retirement savings.

What has happened?

The People of the United Kingdom voted to have their country leave the EU.

What is the EU?

The EU is the group of mostly European countries that have agreed to work together under certain treaties toward common security, judicial cooperation and to provide economic strength.  The union has grown, shrunk and changed since the treaty of Paris in 1951 with a series of more than 10 different treaties.

Why is the UK leaving the EU bad?

It is bad for other member countries of the EU because as a member, the UK helps to support counties like Greece.  They also make up a large part of the economic activity in the EU as the third largest economy in Europe.  The UK will be fined/sanctioned by the EU which will put short term constraints on the UK’s economy thereby affecting our economy and others.  This will have a short term effect on the U.S. markets since they make up less than 4 % of our exports and UK stocks make up very little of our investments as Americans.  There will also be renegotiating for trade deals with the UK.  This uncertainty is never good for business.

Why is the UK Leaving the EU good?

It is a good thing because the UK will have more control over their own economy.   They will be able to trade more freely with the U.S. and other countries, increasing competition, lowing prices and increasing economic activity.  If you are paying attention this turmoil also allows for investment opportunity.

What should I do with my investments?

If you have a properly allocated account you will be diversified into equities, fixed income and alternatives.  The markets in the first few days following the vote in the UK have been volatile.  We have seen gold (alternatives) prices rise significantly, bonds (fixed income) values rise while yields fell and the equity markets were mixed even though you may have seen headlines to the contrary.  While the total value of most of the equity indexes have fallen the portion of the stock market that is made up of utilities is up.

Utilities are value-oriented companies that pay dividends to their shareholders.  When yields fell in the bond market some people turned to value companies to get more income.  If you have money in growth and value companies this may have set you up for a rebalancing inside of your equities.

While all of this movement is happening predicting what will happen next is difficult to say the least.  The one thing you can do is compare your current allocation to what it should be and if the values are significantly different then it is time to rebalance.  Keep an eye out for more changes.  They will happen and when they do you can rebalance again.  From one market cycle to the next you can have higher returns and the correct amount of risk in your portfolio.

If you have any questions about your account or any other financial matter please email [email protected] or call me 240-720-5153