Brexit: What Does it Mean?

On Thursday, residents of the United Kingdom made history when they voted to leave the European Union, the first country ever to do so. And the aftermath of the vote may be a prime opportunity to evaluate where you are going in terms of your trading and investing plans.

The decision, known as “Brexit” continues to send shockwaves throughout the global markets, including in the United States. The Dow Jones Industrial Average and S&P 500 both slid again Monday, continuing their sharp fall from Friday. In addition, the pound sterling continued to fall Monday even after reaching its lowest level against the U.S. dollar in more than 30 years on Friday.

No country has ever broken off from the EU before, so the long-term impact on the economy — in the U.K., U.S. and worldwide — is still up in the air. As this gets sorted out, many market analysts have told investors to brace for more market gyrations.

“It’s not just movement in one direction or another. It’s movement up and down, making it extremely difficult for investors without a plan to figure out their next move,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “That’s the very definition of volatility.”

It’s important to note the split does not take effect immediately. Rather, Brexit will occur over what is expected to be about a two-year period of time. Still, that may not provide much consolation to investors who have already experienced the market rollercoaster.

The Global Impact of the Vote

The potential impact of the vote depends on how you view the existing presence of the U.K. in the overall global economy. 

According to the International Monetary Fund, the U.K. is the fifth-largest economy in the world, with a gross domestic product of about $2.9 trillion. So although the companies that will experience the most direct effects of Brexit may be U.K.-based companies, the sheer size of the U.K.’s economy means its affairs could have an impact on the rest of the world.

The vote by the U.K. may provide fodder for other EU countries to consider splitting from the coalition, although that’s far from certain. Nevertheless, Brexit may lead to large structural changes to the EU, which has a combined GDP larger than any other country except for the U.S.

“Uncertainty typically causes the greatest market volatility,” Correnti said. “Until the outlook for the U.K. and EU economy is further understood overtime, we would expect additional volatility for both U.S. and global markets.”

Your Portfolio and What You Can Focus On

While recent market volatility may have caused you to review the contents of your portfolio, we believe it’s always a good time to review your investments.

“At times like these, we cannot stress enough the importance of having a disciplined, systematic approach to trading and investing,” Correnti said. “Having a plan that includes buy, sell, cash management and risk strategies will help individuals navigate both calm and volatile markets.”

If you have not done so in a while, review all your investments and investment accounts as if they were one portfolio and pay attention to the following guidelines to ensure you have a broader view of all your investments.

  • Understand what an appropriate mix of stocks, bonds and other investments for your portfolio should look like, including what the ratio of small-cap, mid-cap and large-cap stocks should look like for you. 
  • While reviewing the size of the companies you hold, also consider the industries, or sectors, they operate within. 
  • Review your mix of international investments and companies that do business in the UK.

For questions regarding your portfolio, or to schedule an appointment for a portfolio review, please contact your local Scottrade® team  or your investment consultant.

To get more information about portfolio allocation, check out Rebalancing: Keeping Your Portfolio in Check and 8 Tools to Help Get Your Portfolio on Track.

Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss, in a down market.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

International investing can involve substantial risks and is not suitable for all investors. Risks include changes in currency exchange rates; political, economic and social events; potential for illiquid markets; less information; reliance on foreign legal remedies; and different market structures and operations. Investors should fully research any security or strategy before making an investment decision. 

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