Why the Brexit Affects Us All

Against all expectations, the people of the United Kingdom voted to leave the European Union with 52% of voter supporting the action. Global leaders are stunned, as many of them, such as Britain’s own Prime Minister David Cameron, President Obama, and German Chancellor Angela Merkel, campaigned against the possible “Brexit”. Now with the historic Brexit very real, global leaders, economists, and the markets are all scrambling to determine what this means for the world going forward.

Global impacts of the Brexit.

This move is unprecedented. Britain alone constituted about one sixth of the EU’s economy. Brexit supporters claim this is a win for national identity, and for the future control of a rapidly influxing population of immigrants and refugees. But others are concerned the Brexit will have a major impact on the global economy.

Without being in the EU, Britain will no longer be able to enjoy the free trade agreements in place between EU nations. This could slow down their economy, as they struggle to find cheap ways to export their goods to neighboring countries. Europe, now facing potential tariffs imposed by a free Britain, worries it will be more expensive for them to export goods to the country.

Others worry that without the EU, Britain will be far less influential. In reaction to the news, the British pound dropped to its lowest levels since 1985, alarming Chinese markets in the process. The speculation surrounding the future of Britain, the EU, and the global economy is causing panic. Some worry the Brexit will inspire other EU nations to make their own exits, such as Sweden or France. Others wonder if Scotland will leave the UK, as a majority of its citizens voted to remain in the EU.

How Brexit hits us from across the pond.

We are a global economy. That which affects the fifth largest economy in the world, affects us all. Recall just last summer, when volatility in China sparked massive swings in the market at home, prompting many to believe we were on the verge of a major market correction.

The Brexit threatens to slow down the global economy. It stalls the Fed’s hopes to raise interest rates. It leaves investors uncertain. Uncertainty is the fuel of the market, and the more uncertain investors are, the more volatility we will see in the markets.

As soon as the Brexit was announced, US futures markets dropped, and prices of gold raised by as much as $100 per ounce. The precious metal is often a security measure when investors are worried about troublesome times ahead. The Dow Jones is already down by more than 500 points today and the S&P 500 fell by about 3% this morning alone.

Furthermore, many US corporations use Britain as a means to freely trade with the EU. They invest heavily in Britain. Without this trade channel, many will be forced to find new means to do business. Several large corporations have already warned investors to expect declines in profits. This could lead to a slowdown in the US economy as well as the global economy.

Retirement in times of uncertainty.

Why should you care? With markets sure to swing as the world determined what the Brexit means, you need to protect your nest egg. Retirement is a 25-30 year proposition. Your assets need to last you all those years. You need to protect them and generate income if you wish to maintain or improve your lifestyle going forward.

So diversify. And diversifying does not mean choosing different market options, because that is simply spreading your money around different kinds of risk. Instead, allocate your resources in a manner that spreads it out across the risk spectrum. Some out of the market money, some bank money, and using a variety of investment tools.

The economy is now global. The Brexit affects us all. But with proper planning, you need not let that derail your retirement.

 


Al and Nikki Caicedo

Your thoughts are welcome!