Brexit Planning
By now you have likely heard the Brexit news – Britain is leaving the European Union (EU).
You may be wondering, what is the big fuss about? We will get into that shortly.
There is though, a reason why you are hearing from us today and not in the emotion of the news. As Ryan Holiday said in the exceptional book The Obstacle is the Way, “First, see clearly. Next, act correctly. Finally, endure and accept the world as it is.”
One of our Core Values at Illumination is to “Be Intentional”. This has far reaching implications in the way we do things – from our communication to the stewardship of your investment capital. Our intent is to follow an investment plan – a plan that is built around your goals with a portfolio designed to give you the greatest chance of reaching your goals, while taking the least amount of risk in doing so. Changes to our investment portfolios are dictated by pre-set rules and not the whims of the investment markets.
Notice the core value does not say “Be Emotional”. We let the media with their sensational headlines do so. Take this from the Chicago Tribune: “Stocks crash after UK vote to quit EU shocks investors”. Or how about this one: “Brexit turmoil brings Wall Street market plunge”.
Yes, stock markets across the globe declined sharply on the news, but it’s important that you put this decline in context. The U.S. stock market declined 3.6% on Friday. That is not a crash. If you had turned off the news or not checked in on the stock market over the past month you would probably have woken up on Sunday and thought that very little has changed in the world. On May 19th, the S&P 500 finished the day at 2040. On Friday June 24th, after news of Brexit, the S&P 500 closed at 2037. Furthermore, the S&P 500 is 12% higher than the lowest prices visited this year-to-date.
A Brief History of Brexit
The EU, which came into existence in November 1993, operates as single market for money, goods, services and people to flow freely from one country to the next. The creation of the EU benefited the United Kingdom as London is one of the financial epicenters of the world. More dollars are traded in London than New York and more Euros are traded in London than all of the rest of Europe’s cities combined. This system provided a significant boost to Britain.
After the Great Recession, Germany emerged as the economic leader in the EU and became the steward of monetary policy as well. This was not easy for the British people to handle and anti-EU sentiment came to arise. Many people in the U.K. began to advocate for the U.K. to exit the EU. In addition, many British citizens were upset with immigration policy dictated by the EU. EU rules require all member countries to accept any immigrant from another EU country. Western Europe has received many immigrants from poorer eastern Europe which has put significant pressure on social services and created a cultural backlash.
On June 23, 2016 U.K. voters voted in a referendum to leave the EU.
So What Does This All Mean?
This vote, if acted on by Parliament, will have significant global economic impact. The referendum is not itself a binding decision so the outcome is not completely set in stone. First, the result needs to be incorporated into an Act of Parliament in the United Kingdom. Under the terms of the Lisbon Treaty (part of the EU’s governing framework), the United Kingdom will then give formal notice to the EU. After that, negotiations will begin on the actual exit terms. This process is estimated to take two years and may be extended further.
The financial markets, especially stock markets, don’t like uncertainty. The Brexit vote is a classic case of financial uncertainty. If history is any guide, the U.K. leaving the EU is not the end of the world. Markets will will stabilize, entrepreneurs will continue to innovate (did you know that 50% of the Fortune 500 companies were started in Recessions?), and consumers will continue to shop.
In the near-term, we expect market volatility to persist due to the uncertainty of this whole process. We believe that the associated market volatility will ultimately present great buying opportunities for the intentional and disciplined investor. In the meantime, it’s important to focus on what you can control:
- Your Perspective
- Your Asset Allocation
- Your Time Invested
- The Amount You Save
- The Amount of Expenses (including Taxes) you pay.
For our world-travel-inclined clients, this may present a very good time to find a bargain-priced trip to London.