Democracy in Action: Understanding the Impact of Brexit
There has been a storm of media coverage surrounding Britain's recent decision to leave the European Union. As many speculate what will happen next, we take a look at the events that transpired, their anticipated impact, and ultimately how retirement savers should react to recent market volatility.
Market volatility struck, reacting to the recent "Brexit" vote. Expectations favored a majority in Britain voting to remain in the European Union (EU). However, in a stunning turn of events that surprised financial markets and political experts alike, the majority chose to leave the EU. This resulted in significant fluctuations in the British Pound and also raised concerns over other countries exiting the EU as well. In another surprising move, British Prime Minister David Cameron, who favored remaining in the EU, resigned. The combination of these major events led to elevated risks and higher market volatility.
Will Brexit have an impact?
There will be economic ramifications from these events for Britain and for the accompanying financial markets most directly linked to Britain. However, the transition process will run the course of several years. Economies will have ample time to make adjustments as needed. The immediate sell-off in global stocks reflected a degree of pessimism that assumes a very negative outlook, which is always a possibility. We nevertheless maintain that like other crises in the financial markets, the characteristics of this episode are not out of the ordinary in the context of history.
What should retirement plan participants do now?
Stay put. While there are many uncertainties, much of the information in the news is alarmist in nature. The path forward is likely more positive than what was reflected in the steep market sell-off following this unexpected series of events. Times such as these often provide an opportunity to rebalance your portfolio. By rebalancing, gains made in other assets which perform well in this kind of situation, such as bonds, can be used to bolster positions in stocks which become less expensive in a sell-off.
Despite the Brexit surprise and recent market volatility, retirement plan investing is for the long haul. Maintaining a diversified strategy and long-term approach will help retirement plan savers withstand the Brexit storm.