July 1, 2016

Brexit and Retirement

Credit: dailymail.co.uk
The vote by the United Kingdom to leave the European Union came as a shock to everyone, maybe no more so than for the citizens of the U.K. The so-called Brexit vote caused financial markets around the world to plummet, the pound to take a beating, and the economic outlook for the rest of this year and beyond to look shaky. 

The referendum was a clear example of the power of political persuasion. Surveys after the event indicate that a lot of folks who were in favor of the U.K. remaining in the Union didn't bother to vote, assuming their side would be the winner. Meanwhile, some of those wishing for the Brexit voted for that outcome without understanding the ramifications, or even believing their vote mattered. In part, they responded to emotional appeals to halt immigration and protest the regulations coming from Brussels, both of which are important problems. But, leaving the EU will have a direct and long-lasting impact on the economy that will have a serious effect on individuals.

What does the turmoil in Great Britain and the rest of unified Europe matter to those of us who live in America and are retired, or moving in that direction? Our political narrative seems to be leaning toward a turning inward of our economy and commitments. Trade pacts, tariffs, protectionism......concepts most of us are not well versed on but have a direct effect on our daily life have taken on a new urgency since the U.K. vote. 

Satisfying Retirement Journey is not a financial blog. I am not going to give my opinions on the relative merits and pitfalls of such talk. But, I am comfortable in offering some thoughts on how all of this may impact your retirement.

Certainly in the short term, the Brexit vote will be a drag on the world's economic health. As of this writing, the Dow Jones Average has recovered most of the nearly 1,000 point drop it suffered in the first few days. If you were brave enough to look at your investments during that period, antacid pills were probably required. Now, with more than a week of the upheaval behind us, things have stabilized. No doubt more economic shocks are ahead of us. But, the initial shock has passed.

Looking ahead, it could take two years for the U.K. to cut its ties with the European Union. During that time there will be ongoing negotiations to determine the part Great Britain will play in the world economy. The world markets hate uncertainty and that will be our future for quite some time. I expect that means difficulty in planning and projections of financial impact and that translates into an unstable period.

For our retirement planning, I suggest this should mean four things:

1. Make no immediate changes to retirement investments or holdings. The worst time to make financial decisions is when stress and uncertainty are present. Just ask someone who dumped everything in 2008.


2. Review any foreign holdings you have. Those in European countries should be watched carefully as things unfold over the next several months and years. Projections of the Brexit effect on financial growth are purely guesses at this point. All foreign investments need extra scrutiny in periods like this. Yes, money is made in down markets if you know what you are doing. Abandoning investments outside the U.S. is not the answer. Being vigilant is.


3. If you have been looking for an excuse to downsize and simplify, use Brexit as a motivator. Sometimes it just takes an outside event to push us in a direction we want to travel. Use economic uncertainty as a reason to reduce your expenses and cut back on consumption. Even if there is little direct impact on your financial health from the world situation, cutting back to bring needs and wants in better balance is always a good thing.


4. Pay attention to the upcoming election, get beyond the sound bites, and vote in November. As I noted earlier, there are reports of "buyer's remorse" from some who voted for leaving the European Union. Those folks say they did not know the impact their "leave" vote would have on their daily lives, or they thought of their vote as just a protest that would not affect the final results. Many in the "Remain" camp made similar miscalculations when they assumed the outcome of the referendum would be to stay, so they didn't bother to vote.

Could we allow assumptions and miscalculations to have unintended consequences this fall? Absolutely. Is there a "do-over" option come November 9th?  Not until November of 2020.


28 comments:

  1. Hi Bob, I seem to be a good market timer again as I got a big chunk of my assets out of the stock market about a month ago. I did it in anticipation of the turmoil this upcoming election in the U.S. will cause. I will likely put much of it back after I see how it goes. Or maybe just leave it out and move to Canada (ha)...

    I found it interesting to discover that the large majority of those who voted to leave were senior citizens. The young folks voted to stay. Of course much of the vote was from fear of immigration, and the British way of life changing.... Why can people embrace change like you and I and many of your reader do?

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    1. The older we get the more set in our ways most of us become, I'm afraid. If the reports are accurate, the Brexit vote has casued quite a split between generations. It is important to remember that those under 40 have never known a time when the U.K. was not part of the EU. This split is like an unexpected divorce that will cause major upheavals in the daily life of younger residents.

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  2. The market has already recovered. The pound is going up. I think, like everything else, it is a lot of hype. I think it is funny that several said that it was the 'Tea tax" that had them vote to leave. There was some type of tax placed on teapots over a certain size. Britain paid in 44 million Pounds and get back about 6 million. No taxation without elected representation.

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    1. I don't know enough about specifics, but the regulations coming out of Brussels obviously upset many.

      While the financial markets have stabilized, I think the long term effect on Britain will be profound. It doesn't seem likely one can change many of the economic, social, and legal rules that have been in place for decades without problems.

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  3. I have learned over the years to not respond to volatility in the stock market. I have fleeting thoughts of worry, but as you point out, the nosedive in 2008 exemplifies why it's important to not have a knee-jerk reaction. We've always trusted our (fee-based) financial advisor and thus far he has not steered us wrong. We update our spreadsheet quarterly and meet with our advisor annually. Second guessing someone with his expertise would not make sense. We will stay the course for now.

    Your comments about our upcoming election are so important! As a country we may have buyer's remorse for at least 4 years if the wrong person is chosen. The reactions of international leaders to our current candidates should cause us all to think about our country's future as the leader of the free world.

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    1. I just can't fathom why the two apparent candidates are the best we can do. Both have very high negatives and are seen as untrustworthy by an uncomfortable percentage. Is our system so messed up that the good people are excluded?

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    2. There are different degrees of good and bad in people. As for Hillary or any other politician who's been around for several election campaigns there is baggage. In our political world baggage is unavoidable, I believe. That said, I would like to think most of us are smart enough to know intelligence from ignorance. Brexit is a great example when you look at the guy who started it all and has now decided not to run for PM after he 'won' what he supposedly wanted. He is a drumpf clone with a British accent. He didn't know what he was doing and now he's proven that.
      I wholeheartedly believe if we don't start investing more in education and making sure responsible education is available at any and all income levels we are screwed.
      Ignorance has won the day in Great Britain. We can't let that happen here!

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  4. When hub and I were much younger, we hired a financial adviser to help us with investing. We took risks and were rewarded for it, over time. Now that I'm retired and hub is close to it, we've decided not to risk what we cannot afford to lose, and that works for us. Plus, we can sleep a bit easier, in spite of the financial upheavals on the nightly news.

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    1. My stock exposure is less than most experts recommend for someone of my age and financial situation. We may miss some upside potential and be at risk if inflation accelerates but, like you, Betty and I sleep better at night with where we are.

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  5. Unless you have spoken directly with a Brit, everything else is hearsay. Reading that some Brits regret what they have done, voted on, or claim ignorance is pure poppycock. The Brits are not morons or uninformed people as what the media is leading the rest of the world to believe. So, let's just stop this right now. The Brits are highly intelligent people who were sick and tired of having the Germans, or the EU tell them what to do and how to live and what the size of their tea pots were supposed to be.And how many immigrants were to enter their country. Been to London lately? You'd be aghast at what you will see.
    I don't blame them for leaving the EU. Bully for them and I wish them the best, for like forever and ever! The Brits have a stiff upper lip and they will arise victoriously.
    The stock market recovered, the world is back together, no body died or jumped off a roof and the world did not come to an end.
    A very rich, experienced multi-millionaire once gave me great advice when I was contemplating buying real estate in St. Croix. He told me you do not buy real estate in another country or here in the US, in another state, because of all the crazy laws that change constantly. Soon after he gave me that advice, a massacre happened on the beaches of St. Croix and property values fell. It's best to stay close to your own shores. He was right!
    As for America and our American vote, the impromptu 30 minute airport meeting our AG Lynch had with Bill Clinton and how two days later the AG asked a judge to hold off on the publication of Hillary Clintons emails for another 27 months (well after our own election) is more than enough proof for me to realize our political system here in America is rigged, just as Trump stated.
    Please don't think we Americans are stupid either.
    We know what's going on.
    Just as the Brits did.
    We want our country back, too!

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    1. I gather you have talked directly with those in England? Speaking to one person, or ten, or ten thousand still leaves room for misinterpretation.

      This post was more about watching our retirement funds and less about politics. I will leave it at that.

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  6. There have been many updates since the Brexit vote occurred, including:

    1. It appears the markets are now viewing the UK as the winner financially, and the rest of the EU will be the lesser for their departure going forward.
    2. Boris Johnson, the champion of the Leave crowd, was stabbed in the back by his presumed campaign manager, who announced his candidacy for the PM slot 24 hours before Johnson was supposed to. This had nothing to do with Brexit directly; it had everything to do with typical British politics.
    3. Brexit was both a vote on sovereignity as well as immigration. The British people, like many Americans, became extremely leery of being told what to do by faceless beauracrats in Brussels, and were also upset by the steady stream of immigrants coming in to lower their wages and swamp their social services system. Hopefully America will wake up and smell the coffee as well.

    I love how anyone who supported a Remain vote, even those here, have started to characterize those who chose to Leave as some sort of neanderthals or uninformed individuals who just don't "get it". I beg to differ; the British very much "got it", and over 50% of the voters expressed that sentiment.

    As for our investments, I was buying more mutual fund shares during the two day post-Brexit downturn. There was no rationale reason for our markets to nosedive on the news. Besides, do people realize this was a non-binding vote that has to be approved by Parliament? Give the "progressives" enough time and they will pull every trick out of their bag to try to change the result. I guess votes only count if they are the "right" vote.

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    1. Based on these last two comments, it seems like I should have made it clear this post was not meant to be political, but rather a reminder that world affairs affect our retirement money, too.

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  7. "World markets hate uncertainty" - Isn't it all uncertain? If some world market or leader believes the outcome is controlled, I would be leery of anything/one with that much control. 49%:47% - not much separation in that result. What does the whole process say about a government that allows such an issue to go to a referendum vote? Is popular vote an emotional vote? Was this a shortcoming of politics or a calculated move?

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    1. It certainly seems to have backfired on those who assumed the vote to remain would be a winner.

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  8. I always use these down days to convert part of my traditional IRA to the roth IRA. But really that market move was not substantial. I don't know enough to have an opinion on Brexit.

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    1. I am hoping a reader in the U.K. will leave a comment. I'd like the perspective of someone directly affected.

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  9. I "vote" with Janette who said Brexit is a lot of hype about something that will affect us in only a very minor way. And I "vote" with you, Bob, in saying that we should not react emotionally to these world events and just keep a steady course in a well-diversified portfolio with probably less stock exposure than most experts recommend.

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    1. I am pretty sure Brexit will have a very real affect on Britain, but it is too early to say whether it will be a positive or negative.

      I didn't look at my portfolio until today, and that was just because I update my tracking spreadsheet on the first of each month.

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  10. I have always wondered- who came up with the necessary "mix" for stocks and bonds for a successful retirement?

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    1. I would guess a long time tracking what combination of stocks and bonds works best year in and year out. But, good question!

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  11. Hi Bob, your post offers good advice, but I can see how the underlying message of #4 would cause some digression into a political discussion - just sayin'. I appreciate your thoughts on how the UK vote affected the world market, and all of the discussion points that follow.

    Malcolm "trades," so we had a few tense days while he shuffeled the deck, but all is good again. It was not the first time and unfortunately, will not be the last. God forbid Mark Zuckerberg fall off his bicycle and break something again :-). Your reader Pam has it right, "don't risk what you can't afford to loose."

    As for the political discussion, why not consider a post about our upcoming election. I don't know anyone who doesn't have an opinion about that. It might be lively...

    Best to you as always.

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    1. A political post would be "lively" but maybe too hot to handle! Vote based on facts and a logical analysis of the issues, not on emotion or on a whim...that is the message of #4.

      BTW, didn't your recent cruise to Bermuda occur right when a tropical storm was hitting your part of the country? Did you still go?

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    2. Our wonderful Captain Kate out ran the dastardly thing. We actually docked at 6:00 in the evening when we should have docked the following morning at 7:30. Felt no ill effects at all. Rained off and on our first day there, but we didn't skip a beat. You and Betty have to visit Bermuda. It's really a special place. The storm skirted the Florida coast, and left a bit of rain that we don't need.

      P.S. Have you been following our algae problems down here. Happens every summer, but this is the worst. People are ready serve up a bit of the green slime that's floating in our rivers and on our beaches to a few choice politicians. Maybe we'll invite Trump and Hillary to the party!!! Take care.

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    3. We have been to Bermuda. It is a special place.

      When we owned a time share for 20 years near Sarasota we had to put up with Red Tide every few years. That was nasty and kept us coughing for a week. But the algae looks terrible.

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  12. A plus you omitted is the value now of the dollar against the pound - a good time to visit the UK, hug a Brit and see that life is still pretty good at this side of the Atlantic despite all the hype. In a few years time when Brexit is completed it may not be so, of course. Incidentally the reasons for the exit vote can also be attributed to a vote against both austerity and the current right of centre Government which is seen as elitist and lacking in understanding of ordinary people. Sadly too an enormous number of people fell for misleading information and lies peddled by the Leave campaign particularly by a popular and charismatic politician. Statistically the older people were the more likely they were to vote Out. Why? Digging down suggests it's nothing to do with a desire to return to rationing and nostalgia for the Empire but rather that those educated to degree level or equivalent (of whom there are far less, the more mature the electorate) were better able to weigh up the pros and cons and voted to remain. Talk about being snookered by democracy!

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    1. Good insight. I gather Boris Johnson is not very popular at the moment.

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    2. You could say that but amzingly there are some who are really upset that he pulled out of the leadership contest!

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