I’ve contemplated a lot over whether to write anything on this subject as I don’t like to predict the stock markets or political events, it’s a fools game, but when it comes to Brexit and your retirement I want to try and calm some fears.
I’ve spoken to a number of clients in recent weeks about the potential effects of Brexit and more importantly your retirement portfolio, and there is understandably some real worry out there.
Whilst I don’t know what happens next any more than the leading economists in the world, I can try to outline how different Brexit routes may impact your investments and what we do as a company to prepare for these types of political events.
What type of Brexit will we get?
The first thing is to say that events are now moving fast. It could well be by the time this article is published we have a new Prime Minister or are looking at another General Election.
It appears there are divisions right through British politics with leavers and remainers in both the Conservatives and Labour. There’s even divisions amongst the leavers and remainers! Are you a soft brexit or a hard brexit?!
This is what is making it so hard to get any type of deal through parliament. It’s quite possible that even if the first deal agreed by Theresa May gets voted down in parliament, she may decide to quit and with a new Prime Minister, the EU may allow for negotiations to continue and could extend the whole process for another year.
The type of Brexit and your retirement
So what are the key factors here in relation to stock markets and your retirement portfolio?
#1 – Currency / Stock Markets
Well the markets hate uncertainty. So if no deal is agreed it is likely the markets will get spooked. What usually happens first is that the pound falls in value as investors feel that other countries will avoid the UK until they are more certain on what trading relations we have.
BUT this doesn’t mean UK stock markets will fall. The larger UK companies that form the FTSE 100 share index are mainly international companies. A large chunk of their earnings come from abroad so if the pound is lower, when they convert their foreign profits back into sterling they will receive a boost. This could actually boost the share price of these companies like it did when the result of the referendum was first announced and the pound fell.
#2 – Global economy
In terms of the global economy, the UK is only about 5% of the world’s stock market.
So if the UK economy does temporarily suffer post Brexit this doesn’t mean there is going to be a worldwide meltdown. Plenty of other countries are motoring along just fine.
This is why the investment portfolios we recommend to clients are well diversified across the globe. We always say to clients that we are recommending you buy the world!
No matter how bad the NEWS (Negative Events Word Service) media try to make things out remember, we as a country and the world have got through much worst. We’ve been through wars, great depressions and the near collapse of the banking system.
The economy recovers and powers on. Temporary stock market declines are normal.
#3 – Interest rates and alternatives
If the UK economy does start to suffer after Brexit then it’s likely that the Bank of England will keep interest rates lower for longer.
This not only keeps borrowing cheaper for businesses and consumers, (which could in turn help stock markets) it means the opportunities for making your money grow outside of stocks is low.
Keeping more money in cash than you need to means it will lose out to inflation in the long run.
All portfolios we build for clients are diversified across a range of different types of investments (known as asset classes). From stocks to bonds, cash to property. By diversifying we are not at the mercy of one area should things go bad. Each asset can balance each other out over the long run.
What really matters when it comes to Brexit and your retirement
What really matters right now are your goals and your investment timeframe.
How long are you investing for? Are you investing for income or growth?
If you are investing for growth over the long term, say 10 years plus, then providing you are in the right portfolio you can probably stop worrying about Brexit and carry on letting the portfolio do its job.
If your timeframe is shorter and you are trying to raise an income from your portfolio, you may need to seriously look at your portfolio/your financial plan and be clear on the potential outcomes. A good professional Financial Adviser will help you with both.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.