How is Brexit going to affect your personal finances? Immediately after the vote to leave the pound, stock market, bonds and pension values all fell. Economists spoke of the country sliding or plunging into recession, interest rates rising or falling and tax increasing or decreasing. Political analysts announced we would be out of the EU within two years, others said it would never happen. Such a background of uncertainty (which has to be the most used word of the week following the referendum) makes financial planning a tad on the tricky side. Yet, if one looks back to previous periods of economic uncertainty the reality is that they all follow a pattern. Some event triggers a loss of confidence, markets rise and fall, eventually things return to some sort of normality and/or people learn to live with the new economic landscape. In short, there are winners and losers and which side you end up on is as much to do with how well you were prepared for the event as what you do after it has occurred.
As I write this investors are piling into gold. It was around $1260 on the 23rd June and now it stands as $1330. Readers who followed this publication’s suggestions may already have hedged with gold and if they had done so, say, six months ago, when it was hovering at around $1100 they would be sitting on a tidy gain (as of today it stands at $1330) but unless all their wealth was in gold it is debatable whether it will make a huge overall difference. Those buying now are really gambling on the weak-minded investor’s rush for safety when things start to dip. The moment confidence returns, the gold price is going to start to fall again. Also, it has to be remembered that gold produces no yield although (another recent Schmidt Tax Report suggestion) gold mining shares do. Anyway, the point I want to make is that gold is not going to be a universal panacea to all one’s financial trials and tribulations until things settle down.
My own belief is that in the short term the best thing anyone can do regarding their personal finances is review their current position, monitor it and stay informed of all the political and economic facts likely to influence it. In the immediate future there is little chance of a sudden return of investor confidence (a dramatic u-turn might achieve this but seems extremely unlikely and, anyway, there would be a lot of patching up to do before things settled). I don’t, for a moment, feel that markets have bottomed out. Ergo, masterful inaction is almost definitely the best course to take.
I was raised after the War and was brought up to expect disaster by a generation that had had to deal with disaster. My family’s motto in Latin translates rather enigmatically into ‘It increases by going on’ (not something I can see anyone crying as they charge into battle) but my parents’ approach to life was ‘hope for the best, plan for the worst’. It’s a philosophy that has much to recommend it.
It is a bit early, then, to make any firm suggestions as to how to deal with the current crisis. But there are some general points I would like to make:
- If you are an investor it is vital to look beyond the market turbulence and bear in mind that low share prices and weak currency present opportunities. It was interesting to see that the FTSE 100, which is made up of multinationals exposed to lots of foreign markets, recovered much faster after the Brexit vote compared to the FTSE 250, which is a much more British affair. Yet, it is mid-caps that will probably offer the best opportunities in the future for they have fallen the most and are the most likely to show sizeable gains going forward. In general, I do not believe in active investing. On the other hand, there is no doubt that the largest gains (if you have an appetite for risk) are to be made by buying when prices have fallen. One way to hedge against further falls (if you believe that this is what is going to happen) is to buy into international markets such as Japan and the US but with weak sterling you are relying on those markets rising. An equally interesting approach would be to look for stocks and funds that will profit from recession. To give you one example lots of people will probably not travel abroad if sterling is weak but may stay at home. Investing should always be for the long term, which is why doing nothing quickly is most likely to be the best option.
- What about British property? Homebuyers are, understandably, putting off deals believing that the market is going to dip. The only thing I would say about this is that buyers tend to look for discounts before sellers are willing to give them. Property investors always talk about shortages in property but during a recession shortage or not people cut their spending and move less. We can, of course, expect foreigners to come in and snap up bargains.
- When it comes to pensions the people who are most likely to be affected by the current volatility are those approaching retirement. Thankfully, relatively recent legislation allows much more flexibility. There is no need to buy an annuity any more, although some will be tempted in the belief that rates are likely to go even lower in the future. I would certainly recommend, if possible, not drawing on one’s pension yet if you can possibly wait. It will be worth more by doing so. Younger investors can, of course, afford to ride out the turbulence.
The same pundits who have used the word ‘uncertainty’ for the last few weeks have also bandied about the expression: ‘May you live in interesting times’ claiming, of course, that it is an ancient Chinese curse. In fact, there is no such curse or expression in Chinese. Make of this what you will.