4 Ways Investors Can Deal with the Brexit Fallout
Don't panic. You just need to focus on your long-term financial plan.
Most investors don't understand the impact Brexit may have on their financial situation. The political fallout might conjure up memories from the global financial crisis when we observed the values of our homes and investment portfolios decline.
I always remind clients to remain calm and not overreact. It's simple, but not easy.
This is not the time to panic and start selling. In fact, during volatile market conditions, investors often sell low and buy high, which is exactly the opposite of what they need to do to build wealth.
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It's important for you to understand your time horizon and investment risk tolerance. My role as a trusted adviser is to keep my clients focused on their financial goals and objectives.
Here are some strategies to help them and you stay focused on the long-term:
1. Distinguish Between Savings and Investing
Shorter-term goals are best funded with short-term vehicles (cash), and longer-term goals are best funded with investments (stocks, bonds, stock mutual funds, bond mutual funds, stocks ETFs and bond ETFs, etc.). Since most investors fund their retirement goal over the course of 20, 30, 40 or even 50 years (!), retirement certainly falls into the category of longer-term goals.
Unfortunately, many people use the terms "saving" and "investing" interchangeably. They are not one and the same! A successful wealth accumulation plan needs both a short-term savings plan and a long-term investment strategy.
2. Understand Diversification and Asset Allocation
You need a diversified portfolio with a disciplined investment strategy to achieve your financial goals and long-term wealth accumulation. A properly diversified portfolio has an asset allocation that balances risk and reward based on your individual goals, risk comfort level and time horizon.
Stocks, bonds and cash all have different levels of risk and return, so an individual asset class will perform differently based on market conditions. In fact, asset allocation is one of the most important factors in determining an investor's success. Even individual security selection within the asset category takes a back seat to the overall investment mix of your portfolio. After all, it's hard to predict this year's winner. Instead of trying to bet on one horse only to find yourself out of luck, it's better to have multiple horses in the race.
Asset allocation does not guarantee superior investment returns, but by investing in different types of asset classes, you can reduce volatility in your portfolio.
3. Make Dollar-Cost-Averaging Work For You
Many investors don't realize it, but when they contribute to their 401(k), 529 plan and individual retirement account on a regular basis, they are taking advantage of dollar-cost-averaging.
Dollar-cost averaging refers to the strategy of investing a pre-determined amount in a particular investment on a regular basis. It helps reduce the emotional highs and lows of investing. By investing consistently, more shares are purchased when prices are low, and fewer shares are bought when prices are high. If the market is performing well, you are happy because their existing shares increase in value. If the market is experiencing volatility, you are also happy because they can purchase new shares at a lower price.
It's important for to view the downside performance in equity markets as an opportunity. In other words, the volatility brought on by Brexit presented us with an opportunity to buy low.
4. Be a Control Freak
It's important to know what you can control. You can't control stock market performance, movements in interest rates, currency fluctuation or real estate valuations. You can control how you react to market volatility. Uncertainty can create unease for us. However, an integrated financial plan and carefully constructed investment strategy for long-term investors account for short-term volatility. Hasty decisions based on unexpected events usually don't benefit investors over the longer term and impede progress towards your financial goals. For this reason, I advocate a long-term perspective.
Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. She is a CFP Board Ambassador and proudly serves on the FPA National Board of Directors.
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