It is too early to know how everything will pan out, indeed it's only been three days since the UK electorate voted to leave the European Union, yet it has been the catalyst for some highly unpredictable political dynamics and for a fall in sterling to its lowest level for three decades. But above all we have had the media full of speculation and emotional commentary, talking of carnage, turmoil, negative territory and tanking in the "markets", falling house prices and rising mortgages.
Two things that effect our ability to make decisions are emotions and uncertainty
So how can we deal with the emotional bias and uncertainty and make the best decisions we can. I take a look at two important areas interest rates and investments.
By the close of business on Friday the FTSE 100 stood at 6138 or -3.15% from the previous day's close at 6338. The media called this carnage, given the fact that we have been experiencing volatility in the markets since last July and indeed during the last year the FTSE 100 lowest point was 5,499.50. In fact the FTSE 100 stood at 5,800 only last week.
The drop in the FTSE 100 was less than the German Dax -6.82% and less than the French CAC -8.04 and less than the Spanish IBEX -12.35 %
The FTSE 100 is made up of predominantly UK registered companies that trade globally and these companies will perform better than domestically focussed UK businesses. The pound's fall in value will not be without disadvantage as companies with oversea's earnings translate some of their profits back into sterling.
Many speculative investors had assumed that the UK would stay in and had taken positions in their portfolios to reflect this. When the result came in on Friday morning that the UK had voted to leave the EU, they were "caught with their pants down" and panic ensued. Stock was sold that would fare less favourably under a Brexit and a potential recession as a result of short term re-entrenchment of consumer and corporate spending. For example, some of the shares that came off worse were house builders on the back of fears of a recession and no longer being able to rely on a free flowing source of migrant workers needed to achieve the housebuilding targets. As the markets opened Redrow's shares fell 77% - this is not down to a sudden change in the management of Redrow as a company and interestingly a few hours later the shares recovered 57% of the fall.
I'm sure there were city traders shorting the market and making huge profits but in personal financial planning we don't operate in the same way. We leave that to the hedge fund managers and concentrate on the bigger picture, sustainable growth over the long term.
Investment principles remain the same :
1. Know what your financial goals are, how much you need and when you need it by and why you need it - then remain confident in your goals adjusting them to suit your needs not to fit in with circumstances.
2. Be clear on how much volatility you can personally deal with and what will keep you awake at night. Don't exceed your limits.
3. Ensure your investments are not in shares of one or two companies but in a fully diversified portfolio across geographic regions and across asset classes. Invest in well managed multi asset funds or in the services of a discretionary fund manager and you will be well positioned to see through any short term market volatility.
4. Volatility can also be your friend, if you are investing regular sums of money. Invest little and often, sometimes you will be buying "units" at a lower price and when prices move up, these are the ones that will make a significant difference to your overall wealth. You can't time the markets but you have more of an opportunity to benefit from up turns if you are continually investing small sums.
5. A loss is only a loss if you cash in your investments.
Fund managers that I speak to aim to make returns over the long term, in a world where investment returns are driven by the top down impact of global macroeconomic conditions as well as the bottom up factors of enterprise, innovation, management and profitability of companies. At the moment we are experiencing a higher amount of political influence or top down impact but their reasons for investing in selected companies will be based on deep analysis and conversations with the company directors. If the conviction was there in the first place any changes made in the underlying fund investments will not be as a result of a knee jerk reaction to a Brexit result.
For the of us not concentrating on saving and investing, Brexit will effect borrowers. So what's going to happen to my mortgage, should I get a fixed rate now?
Interest rates have been held at all time low by the Bank of England in order to allow time for the banks to build up their reserves and as a consequence of their concern over the total debt that each household currently runs. It is only a matter of time before interest rates increase but the time being it seems that the drop in the value of the pound has meant that interest rates may well be cut, even to zero!
The Bank of England has said it has stress tested worse case scenarios than a Brexit and will do all it can to support the economy. If the pound falls it makes UK goods and services cheaper to buy but puts pressure on exporters and creates inflationary pressure internally. Methods to counter this could be to reduce interest rates. There is speculation that rates could be cut by 0.25% by August and potentially go as low as 0%. The bank has also said it will consider monetary intervention with another programme of quantative easing if needs be. Interest rates could reduce.
But again, stick to your goals, if you are buying a property now with a mortgage and a fixed rate is right for you because it gives you stability of payments then it is right for you regardless. A lot has happened in the last three days let along the next two - five years.
We need to try and equip ourselves to counter emotional bias and uncertainty as best as possible so that we don't remain in a state of stasis. It is predicted that the UK will be in a state of limbo for the next two years whilst legislation is re written and the terms of a Brexit are agreed - don't let it become a personal limbo that denies you two years in progressing your own goals.
....and finally as I write it appears that we may have a constitutional crisis on our hands as the overall percentage of eligible voters who voted to leave the EU was 37% . This may have given a political mandate to leave but I understand it may not have the legal standing that is required, as it is less than the 40% trigger, which requires our Representatives of the House of Commons, our MP's to make up their own minds. Parliament has to protect the greater interests of the country and with the majority of MP's wanting a remain outcome...... yet more uncertainty lies ahead. So for now I won't look at pension legislation, not just yet.
What questions have you got about how Brexit may effect your financial planning? Let me know I'd love to hear from you. Please leave your questions in the comments section and lets get some conversations going.
Jill Turner - 26th June 2016
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Welcome to the blog curated by Jill Turner. The pages are not intended to give advice, they are just the real life stories from a real life financial planner and the wonderful people I get to meet.
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Jill Turner is a member of the Personal Financial Society