This past week, the world witnessed an event that most
people probably didn’t think it would happen. I believe it’s too soon to really
know what effect the Brexit will have on the world economy. Certainly many
regular people wonder what it actually means for their own retirement plan.
Here are 3 lessons from Brexit:
1. There’s
stuff you just can’t control
I’m sure you’ve heard all of the “advice” out there. Have an
emergency fund. Spend less than you make. Save for retirement. Save using this
or that type of fund. And the younger you are, the more aggressive you can be.
Well, that may be all true, and even if you followed all of
the “advice”, sometimes there’s just stuff you can’t control. In this case, European
politics had – and will have – a huge impact on global financial markets. And
people always think that these types of market upheavals are really rare. That
couldn’t be further from the truth – so-called “black swan” events happen with
pretty regular frequency.
2. Diversification
is good, until it isn’t
“Don’t put all of your eggs in one basket” is probably
something you’ve heard since you were a kid. I certainly have. And under normal
conditions, that’s true. And there’s study after study that shows the value of
diversification and how it can help reduce risk.
During the black swan events, conditions are hardly normal. Stock
markets in the US
were down between 3% and 5%. European stock markets were down 3% to 12%, and
Asian markets had similar losses.
3. Keep
perspective
The long term effect of this vote is tough to predict, but the
headlines were pretty dramatic:
Breaking news! Stock
markets plummet!
I tried to reach Fidelity on my phone app – it’s where I
keep my accounts – to just look up the balances, and I couldn’t get through at
all. The system was overloaded with people panicking.
While no one likes to lose 3%, 4%, or 12% in one day, the
market turmoil pales in comparison to October
19, 1987. The market lost almost 23% in one day! Now
that was something to panic over.
Ultimately, things happen. And you can’t always control them
despite following all of the “advice”. It doesn’t mean you have to resign
yourself to the situation.
What it does mean, however, is that to protect your wealth
from black swan events, you have to think differently. There are other ways to
save for retirement that are not affected by stock market losses – such as
using home equity or even permanent life insurance.
I’m sure the people of the United
Kingdom had no intentions of wrecking your retirement
account. The question for you is – do you want to let them do it again?
