Wow, what an incredible past week. Unless you’ve been living under a rock for the last week you would have heard that the United Kingdom has voted to leave the European Union, commonly referred to as ‘Brexit’. Whilst I was a strong ‘Remain’ supporter, devastated by the vote of the British public on 23rd June, that is not the focus on this piece. In this post I want to focus on sharing the 5 best pieces of investing advice I have for millennials post-Brexit. Specifically, I’m going to explain what has happened in the markets over the last few days and then detail the 5 pieces of advice I am currently following myself and suggesting others should adhere too.
What has happened
There is absolutely no doubt that the global markets were not expecting the ‘Leave’ campaign to win, in fact the private exit-polls which major financial institutions had commissioned suggested a ‘Remain’ victory.
If there is one thing that markets really hate, it’s unexpected uncertainty and that is exactly what we’ve had over the last week or so.
The FTSE 100 dropped by 8 per cent in initial trading on the morning following the result of the UK referendum. Things didn’t stop there, on Monday 27th June the FTSE 100 lost another 2.6%, European stocks lost 2.99% and the US Dow Jones was down 1.8%. Whilst there has been a significant impact at the macro level, not everyone has been hit equally. Financial Institutions are probably the heaviest hit, due to the fact that a stumbling UK economy could turn a higher amount of debt into ‘bad debt’, resulting in increased loses of banks and less demand for mortgages. This has also affected property-related stocks.
On Wednesday 29th & Thursday 30th June some markets then began recovering, during market trading on these days the FTSE 100 was continually above the pre-Brexit vote figure of 6,338.10, and whilst the FTSE 250 closed 3.2% higher on Thursday, it was still 7%+ below its pre-exit figure.So what is causing this negative turbulence within the markets? As I’ve already highlighted, a major cause of this financial stock has been a result of the extended period of uncertainty facing the world economy whilst the UK negotiates new deals both with the EU but also other major economics of the world. However, there are other reasons, which I want to touch upon briefly;
The EU is the United Kingdom’s largest trading partner, receiving about half of all U.K. exports
The UK has been one of the shining lights within the European community in recent years.
Many are concerned about the knock on impact to Europe as a result of Brexit. Are more countries now going to look to break away from the European project, could we have Frexit (French exit) next, where 61% of people are disenchanted with the EU for Czexit or Nexit?
It is always important to understand the political and social ramifications of major economic events such as Brexit, because it helps you understand how the markets could be reacting and how best to respond to that.
Now that a suitable level of background has been covered, I’ll detail the 5 key things millennials should be actively thinking about and acting upon during these volatile times.
Don’t over-react
Even though the UK political elite is in free fall and the country is a far less inclusive, progressive and nice place to be following the vote, the global markets are, thankfully, not in such a bad state.
My first, and primary, piece of advice is this; do not over-react, but to hold steady, continue to drip feed money into the markets, ensure you’ve got a diversified portfolio, and keep an eye out for any good bargains.
Why you ask? Here are a few very good reasons;
Whilst the FTSE 100 contains UK based companies, these firms are also global powerhouses, it’s estimated that around 2/3 of their demand is abroad. So whilst it’s likely Brexit will lead to a fall in UK demand sales & revenue for the big companies – on the whole – isn’t going to drop off the cliff.
This line of thinking it further re-enforced by the fact that the significant fall in sterling (GBP) is good for UK exporters because their goods become relatively cheaper for foreign buyers, and therefore exporters will see an increase in sales and revenues.
There is general agreement that the fall we’ve seen in the last week or so was an over-reaction and the correction is already being seen.
Good companies are still good companies, many industries are much less impacted by Brexit than financial institutions and property companies and therefore remain excellent companies even after Brexit. As the famous saying goes, don’t throw the baby out with the bath water.
If you get out, you probably won’t get out or back in at the right time. There is a mountain of research out there which shows that predicting and trying to shelter your investments from falls doesn’t work, for example, if you missed the 40 best days of the FTSE 100 in the last 10 years you would have barely seen the same amount of money you put in. It can’t be said strongly, enough – especially for millennials – staying in the market, having diversified portfolio, for the long term is the only reliable way of investing.
Some of this rationale has been seen in the market over the last few days as many stocks have started to recover, but my advice around over-reacting applies to this situation as well. Don’t get caught up in the recent relief that the world didn’t end post-Brexit, there are still major challenges facing both the UK, EU and world ecology, the see-sawing we’ve seen this week will continue in the near future.
There is one group of millennial investors who cannot sit back and play the long game, and that is those who do not have a diversified portfolio. You need to be diversified across asset class as well as regions. If you are investing in an active fund rather than individual stocks your fund manager should already be managing this in your portfolio, but there is no harm in checking in to confirm! If you are not diversified, start rectifying the situation.
You’re not suddenly Warren Buffet or George Soros
Whilst the gut reaction of the majority is to pull your money out of the markets when there is a financial shock and a period of prolonged uncertainty there is another reaction which can be equally if not a lot more painful; trying to over-trade or make a quick win during the (positive or negative) chaos.
Unless it’s your full time job don’t try to play the short game, people with much more money, understanding and access doing that.
Instead, focus on ensuring that your long term portfolio is leveraged in the best possible way, and tinker if you think that Brexit has left you exposed in a certain area.
I am not saying that you shouldn’t undertake any activity during this period. If you are a stock picker and have been researching a number of potential investments in recent months but have held off buying because the price was slightly high, then now is the ideal time to buy up that stock at a discount.
Volatility appears to be the new norm, and that is only going to increase in the wake of Brexit. The biggest cause of uncertainty I foresee stems from the fact that the ‘Leave’ campaign won pedalling an impossibility. It promised significant restrictions on labour alongside unlimited access to the free market and economic growth. That isn’t physically possible and at some point there is going too have to be a reality check, until that happens and a priority order is decided – either by the British public or politicians – and ultimately Britain exits the EU, then volatility and uncertainty will remain, so get used to it.
However, that doesn’t mean all doom and gloom. When researching this piece, I found that in the 19 of 21 positive calendar year returns since 1990, the S&P 500 (500 biggest companies – market size – in the USA) spent some portion of the year in negative territory.
Given the current volatility in the market and the swinging on individual stock prices I won’t go and recommend individual stocks to invest in however with prices where they currently are there definitely bargains to be had, so I will remind you of the key things to consider when looking to identify a new stock to add to your portfolio:
Low Price/Earnings Ratio
Low Price-to-Book Ratios
High Earnings Per Share (EPS)
Knowledge – make sure you spend time reviewing and understanding the company and its market before you drive right in
Brexit won’t have a long term impact
When looking to understand the impact of financial shocks and the decisions you should make as a result of them, one of the most important things to consider is length of time of investment. Millennials investing are most likely playing the long game, and a number of very credible individuals and institutions are predicting that whilst Brexit will continue to cause uncertainly in the short term (1-3 years) it shouldn’t have a long term impact.
For example, The International Monetary Fund (IMF), projects that U.K. gross domestic product will only be 1% lower in 2021 than it would have been if Britain hadn’t vote Brexit. 1% over 4 years is a small amount, even smaller when you then consider you’re likely to be investing for another 30-40 years!
Others are even more optimistic, Neil Woodford, the legendary fund manager, highlights that whilst UK GDP will be lower over the next 1.5 years, because inflation will increase due to the falling pound, nominal GDP is likely to remain similar, therefore suggesting a limited real impact (https://woodfordfunds.com/blog/brexit-initial-thoughts/)
In an Independent Report commissioned by the Woodford Fund found that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union, and in fact there are bigger issues facing the world economy such as unfunded retirement commitments in Western democracies, wealth inequality, the rise of political populism and the scale of rising debt in China (https://woodfordfunds.com/economic-impact-brexit-report/)
Finally, as I’ve said in my earlier piece titled ‘Pension Saving as a Millennial’ time is the best and most important asset available to millennials, by the time retirement comes around the impact of Brexit in financial markets should be a small bump in the road – and hopefully the UK will be back in the EU! Find my piece on fundamentals for Millennials on pension saving here: http://jablifestyle.net/2016/05/30/pension-saving-as-a-millennial/
The alternatives aren’t more attractive
The final thing I want to do in this piece is remind everyone that whilst the financial markets can be – and will remain – volatile, the alternatives out there for investing your money right now are bleak, let me take you few a couple of them;
Cash ISA – the current interest rate in the UK is 0.5%, already a historic low, and Brexit has only served to significantly increase the likelihood that the Bank of England will lower interest rates further. A 0.25% internet rate on a Cash ISA – or worse – really makes it a poor investment choice, that is £2.50 return on a £1,000 investment.
Premium Bonds – have had a bit of a re-vamp recently, but remain unattractive. Unlike other investment types there isn’t an annual interest rate but an ‘annual prize rate’ of 1.25%, but this is just an average, so many people will get far less than that.
Peer2Peer Lending – absolutely the best of the 3 alternatives I’ve highlighted, currently your looking at a return of 2.5 – 5% depending on length of time you lock your money away for and who you sign up with. However, this is a new industry, and whilst there haven’t been any big horror stories the future is always unknown.
Above obviously isn’t a comprehensive list of all alternatives, I’m looking to post a blog soon which will go into the alternatives in a lot more detail, but I wanted to give a brief overview.
As you can see from the above, there isn’t an obvious glowing alternative to stock market investing out there, and whilst these alternatives should be part of your overall investment strategy, they shouldn’t be where you are looking for your major yearly gains.
Conclusion
The aim of this piece has been to highlight and justify the following 5 key things of investing millennials to consider in the wake of the UKs decision to leave the European Union; (1) don’t over-react, stay calm and level headed (2) you’re not Warren Buffet, so don’t suddenly think you are (3) volatility in the UK and world markets will remain, whilst this will create uncertainty it also creates a lot of opportunity, so be ready to take advantage (4) there is a large amount of evidence to suggest Brexit will not have a longer term impact on the UK or world stock markets (5) in the current climate the alternatives aren’t as rosy as the stock market for optimising your gains.
The final thing I that I think pulls these things together nicely is the fact that as millennials we have time on our side, so remember to take the long-term view when investing in the stock market, play the long game and don’t get too caught up in the short term.
One thought on “Investing Advice for Millennials Post Brexit”
Every weekend i used to pay a visit this website, as i want enjoyment, as this this
web page conations genuinely nice funny information too.
Comments are closed.