With a possible no-deal Brexit looming, it’s hard not to feel uncertain about its impact on your personal circumstances.
We’ve seen the report by the Bank of England suggesting that a worst-case scenario is indeed a no-deal Brexit, which could lead to a shrinking economy, house prices falling by over a third, unemployment doubling and inflation rising substantially. But that is the worst-case scenario: there is some comfort in knowing that the actual outcome is likely to be better.
There are roughly four months until 29 March 2019. Four months within which to read the 25 or more positioning papers explaining what post-Brexit life will be like. Should the NHS start stockpiling medicines? Should we all start planting organic vegetable gardens so we can still enjoy the food we know and love in a post-Brexit world? These are just some of the questions that people are asking.
Many of our clients are concerned that they have four months to gain understanding of what a no-deal Brexit means for their finances. It’s easy to panic, but it’s smarter to hold your nerve.
Yes, Brexit will indeed impact our interest rates and the pound, along with the UK’s economic growth. These, in turn, could affect house prices, mortgages and savings rates and potentially even our jobs.
But, we also have four months to prepare and formulate a plan. We have four months to understand how Brexit could impact our long-term financial plans. Believe it or not, embracing any potentially bad news now could result in better investment opportunities in the longer term. It’s time for a reality check.
Indeed, if you can stay the course over the next decade, you’re likely to benefit from those opportunities that will undoubtedly come our way.
1. Be realistic and do not panic
Our top tip is… be realistic. We’ve seen unusually high investment returns since March 2009; it’s easy to forget that bull markets can give people unrealistic expectations over the longer term. Constant expectations of high performance leave us feeling disappointed when our portfolios deliver what would otherwise be deemed an acceptable level of performance.
One of the reasons many investors fail in difficult times? They panic and sell their investments to avoid further loss. “Buy low, sell high” does not apply in times of financial crisis. Ironically, panic-selling is what fuels massive market declines. In order to feel safe, you may be tempted to sell risk assets, such as equities. But doing so could have a disastrous effect on your longer-term financial plans. Volatility is good – it provides investment opportunities.
Equities are – and will remain – the best long-term wealth creator and you should not stop investing when the market seems volatile or when it is in a corrective phase. The stock market is a good creator of wealth, no matter when you invest.
Over the past 10 and 20 years, UK equity returns have been rather disappointing, once account inflation and fees are taken into account. However, the story is very different if you invested globally. The world’s largest financial market – the United States – has clearly yielded significant rewards and a global investor should always have a meaningful asset allocation on this market. Similarly, an investor should consider regions such as the emerging markets and Asia for above-average growth.
However, no region, sector or company is bulletproof and there is always a time to sell and move on to the next opportunity. Invest accordingly and diversify your portfolio to avoid putting too much of your money into any one region, sector or business.
3. Budget, budget, save, budget, budget
It’s common sense – you need to have a budget and a spending plan. By being aware of your incoming and outgoing finances, you can calculate your fixed costs and – just as importantly – the amount you need to save each month. What will you do with that amount?
Everyone should have a Brexit or ‘rainy day’ savings account. If we leave the European Union, we’re likely to have a period of financial anxiety or even a recession.
A recent study revealed that a quarter of British adults have no savings. You should have at least three months’ gross income in savings, if not six. The time to prepare narrows with each day, so you should make every effort to put away as much as you can from now on.
Working on your savings means that you will be prepared should a no-deal Brexit cause disruption to trade agreements – which could affect imported goods, such as food. Imported goods could become more expensive and we should all be prepared to need more cash on hand.
4. Check your accounts
In the event of a no-deal Brexit, we may need to use our overdraft facilities to cover higher prices and any potential financial disruption. This is a good time to check your current account and make sure it’s the right one for you. Overdraft fees vary from institution to institution and if you’re likely to need an overdraft facility, find the one that’s best suited to your needs. You may even consider switching banks. A little research and paperwork now will save you money in the future.
A note about savings
This is where we have some good news. If the Bank of England does raise interest rates, it will affect savings and should boost returns. This means that post-Brexit, those who rely on their savings for income will benefit. This does not mean, however, that your bank will automatically raise the interest rates on any accounts that you may have. As with current accounts, now is a good time to check your savings accounts and make sure you’re taking advantage of the best account for your circumstances.
5. Get smart about interest rates
The Bank of England has hinted that interest rates will rise in a post-Brexit economy. For those on a standard variable-rate mortgage, consider switching to a more affordable rate or a fixed-rate mortgage. Why not take the money you may save by switching from a standard-variable rate to a fixed-rate mortgage and put it straight into your Brexit savings account? That’s two Brexit birds hit with one pretty easy stone.
Credit cards will also be affected and card providers are likely to raise the interest rates on your existing cards. Providers cannot change rates without considerable regulation and they are not allowed to change your current terms if you’ve had the card for under a year. Fortunately, if your providers do raise their interest rates, they are required to notify you first. You will then have the option to close your account and pay off the balance at your original rate. Future credit cards are likely to have higher interest rates and any new loans you take out are likely to be more expensive.
Our overall advice? Hold your nerve
Despite periodic and unavoidable crashes, stock markets tend to recover over time. The worst thing you can do is sell out of the market entirely. Remember, long-term investors should be relaxed about volatility and subsequent opportunities. It is tempting to think that cash is the best place for long-term savings, but if you embrace opportunities and avoid panicking, then market corrections can become a friend. Once again, remember that “the trend is your friend”.
It’s important to remember, especially as Brexit approaches, that no matter how big a market correction, gains made during the recovery period that follows, generally outweigh any losses. We cannot predict exactly what will happen in 2019 and beyond, but we can safely look to history and take comfort from the knowledge that markets are resilient and deliver exceptional returns. Short-term bear markets are painful, but bull markets are very rewarding if you hold your nerve.
Take these four months to prepare for Brexit: consider your accounts, diversify your portfolio, think about interest rates and decide on your budget. But most importantly, hold your nerve. Ensure that you have the right capital allocation in your portfolio and stay the course.
Petronella West is the CEO at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us by email. We would love to hear from you.
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