Imagine that you have been planning your vacation for months. After some routine maintenance, you pick up your vehicle from your local service garage. You load up your family in the car and start driving to your destination. Then, 200 miles from home, your oil light comes on. You continue to drive, but then your engine light comes on. You continue to drive while wondering what could be wrong. Suddenly, your engine seizes up and your vehicle stops in its tracks. How do you react? Do get your family out of the car and start walking home? Do you panic and start yelling at your car? Or did you plan ahead and purchase something like AAA Insurance to help you in times of need?
It should not be the situation that dictates your response, but what you have done in preparation for dealing with situations that present themselves. With that said, we should realize that we do not live or plan in a vacuum. We cannot control everything. Outside influences will have an effect on us, both man-made and natural. When possible, we should adapt, adjust, and respond, rather than simply react. Reactions can have negative results in the short term and the long term. However, in any given circumstance, sometimes a reaction is the only option we have.
In the case of the BREXIT vote, there was knowledge of the potential vote. Some investors reacted to the potentials by selling off a number of shares that they thought might be affected. Some did so immediately after the vote. Why? They panicked. They took a short-term view. They did not understand the full impact of the vote. What did this accomplish? They helped to cause additional panic, world-wide. The global markets hemorrhaged more than $2 Trillion in paper wealth. This was the worst sell-off since September of 2008. These types of reactions affect everybody.
What should we do when these types of events are coming up or have occurred? The best advice that I can give you is to stay the course. Be thoughtful with your decisions. Your retirement plan is a long-term plan and your choices along the way may effect multiple lives. There will be highs and lows on your journey. Maybe a better frame of mind would be to think about it as ebbs and flows. You can’t stop the tide from coming in or going out, but you can work with the power of the water instead of against it.
Will the Brexit vote adversely affect the value of your retirement portfolio? It will most likely have some effect. The extent is yet to be fully determined. A number of factors will go into answering that. What is your risk tolerance? Where are your investments? How aggressive is your portfolio? What type of return are you looking for? How diversified is your portfolio? You do not simply answer these questions once and then forget about them. As events in your life and the world happen and unfold, you adjust your retirement plan as needed, to keep your boat afloat. Having access to your financial advisor/professional at times like this is very important. They can help you to steady your course and smooth your seas.
It may take five years or more to discern the ramifications of the UK’s departure from the EU. However, the reactions of individuals, businesses, governments, and other countries (in the meantime) could either enhance, diffuse, or completely change the direction of the current track. Step back, take a deep breath, seek the advice of professionals, and step forward with purpose. Retirement may be tomorrow for some and a lifetime away for others. Whichever it is, be motivated today to celebrate now and in the future through patience, understanding, and planning.
-Michael Hermanson, CPA | CGMA