Brexit, investment markets and your financial plan

To say Brexit has been chaotic might be an understatement. Now that we’re set to have a new leader at the helm of the Conservative Party, time will tell what progress will be made. But, the economic effects of Brexit have already been felt by many.

Since the referendum three years ago, such prolonged political and economic uncertainty has been exacerbated by Theresa May’s numerous rejected deals and the ongoing Irish border dispute. As a result, confidence in investment markets has been rocked and we’ve witnessed increased volatility.

The Bank of England has just warned that economic growth could grind to a halt during the second quarter of 2019, amid mounting risks to the economy from a no-deal scenario. And, whilst economists are largely in agreement that leaving the EU under any circumstances will have some adverse economic consequences, it’s impossible to accurately predict what will happen in investment markets.

The one certainty is that volatility does happen, but we can’t anticipate the severity and exactly when. Uncertainty can make investors nervous – you might be thinking; should I wait to invest? Should I hold more cash? Do I need to rebalance my portfolio? Brexit will continue to influence markets, but, before you make any rash financial decisions, let’s get back to basics.

Your goals are the foundation of your financial plan

Whether you’re a new or experienced investor, think about what you’re investing for in the first place. It’s likely those goals will be long term, like planning towards your retirement. With a long-term horizon, your portfolio has plenty of opportunities to weather market volatility and benefit from compound growth.

Try not to get too distracted by what will ultimately be a short-term situation in the grand scheme of your financial plan. History has demonstrated that after the financial crisis in 2008, that markets do recover. In fact, we experienced a ten-year bull market after.

If your financial plan was originally appropriate and has been regularly reviewed, stick with it. If you are overdue a review, please give our office a call.

There is no substitute for patience, discipline and rational decision making in financial planning. It’s important to remember that when markets do decline, you only make a real loss by withdrawing your funds.

Making rash decisions has the potential to be more damaging to your future financial security than doing nothing at all. Also consider that when markets fall, unit prices are cheaper. Depending on your circumstances, it might be the perfect opportunity to make additional contributions.

Cash isn’t always king

If you have a lump sum to invest, phasing contributions over time to smooth the impact of volatility might be appropriate. But, the inherent danger in holding large sums of cash over the long term is the effect of inflation. Trying to time an investment in the market is virtually impossible, waiting for the unknown is a big gamble and whilst you wait, the value of your savings will be eroded.

Data from the Office for National Statistics show that in May the rate of inflation was 1.9% – close to the 2% rate the Bank of England is currently targeting. This effectively means that prices are 1.9% higher than 12 months ago.

The most generous easy access cash accounts only offer 1.5% interest, meaning that if the rate of inflation remains 1.9%, cash is effectively worth 0.4% less in a year’s time. Rather than investment risk and volatility, inflation means that, in the long term, cash is almost certainly going to lose value. Post-Brexit, depending on the outcome, holding large sums of cash could be even riskier. In a ‘no deal no transition’ scenario, the Bank of England predict inflation could rise to as high as 6.5%.

The future?

Politics and market fluctuations have been unpredictable, at best, since October 2018. We can’t be sure what the future may hold, but we can ensure we best plan for your immediate personal circumstances, long-term goals and aspirations.

If you’d like to discuss current market activity, Brexit or your financial plan in any detail, don’t hesitate to get in touch. Remember, it’s your financial plan. We need to ensure your money is working hard for you and not get distracted by short-term noise.

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