For those unaware, Brexit has occurred.
What is Brexit?
Brexit is short-term for the United Kingdom voting to leave the European Union.
But, what exactly happened?
British citizens recently voted on the question: ” Should the UK leave the European Union or remain?”
Although the voting was close, Brits voted 52% leave, while 48% voted to remain.
Now, simply because a vote won out in favor does not mean Britain will leave the EU immediately. In fact, it will be a process over the next 2 years or more.
Had Britain decided to remain within the Union, the markets probably would have breathed a sigh of relief. However, since the opposite has happened, many are worried that the sky is falling.
Why are people worried the sky is falling?
Whenever something BIG happens within the world, the markets are affected.
AND, whenever the markets are affected, people begin to freak out, especially the talking heads on television.
Therefore, it’s nothing new or out of the ordinary that Britain, a staple within the European Union would lead people to believe the world is ending. But, in the same sense, Britain leaving the Union is a pretty BIG deal.
One of the reasons it’s a big deal is because countries who deal with Britain say it is.
Both India and China among other countries who make up important trading partners for Britain had indicated in the past that they were worried that an exit would create regulatory and political volatility that could certainly threaten the economies of everyone involved.
Even the U.K. Treasury has said that its analysis of the situation showed the nation would be “permanently poorer” if it left the Union and adopted any of the alternatives. In addition both the Bank of England and the International Monetary Fund have warned of long-term negative effects that could come from Britain leaving the European Union.
So, one might think this is just a bad move for Britain, but in reality, it can have lasting impacts on the global economy.
First off, the European Union could run into economic trouble. If Britain leaves, who’s to say other countries won’t follow suit?
Also, not only is that a possibility but with Britain leaving, there is a whole lot of uncertainty around the future of the European Union. For example, if financiers and companies are concerned that they may get cut out of free-trade channels, they may look elsewhere for safer uses of their money.
I don’t want to get too much more into detail on the possibilities as there are great write-ups elsewhere. However, I do want to talk about how this does and could affect the Thrift Savings Plan and its investors.
How does Brexit affect the Thrift Savings Plan and its investors?
The TSP is made up of the G, F, C, S, and I Funds, plus the L-Funds which is a composition of the others.
The C-Fund tracks the S&P 500 which is a composition of the top 500 companies in the U.S.
When Britain announced that they would be leaving the European Union, the S&P 500 turned negative for the year-to-date. One of the major reasons is Wall Street suffered its largest selloff in over 10 months.
In fact, the trading volume was so high on Friday, that it was the busiest day in trading in almost five years. The S&P 500 and thus, also the TSP lost all of the year’s gains and suffered its largest decline since August of last year.
The I-fund fell dramatically on Friday’s news going from 24.60000 a share to 22.6615 in a matter of hours. This is the fund that would be most likely to be affected by Brexit due to it being an International Fund.
Now, these are some of the short-term happenings, but what about the long-term?
Much of what CAN happen in the future is mere speculation.
Will Brexit cause the U.S. economy to sink? In my opinion, no.
However, I do believe that Britain exiting the European Union may rock the over economy.
Over the past seven years, the American economy has weathered quite a few international risks, although sluggish U.S. growth is likely to continue.
There are three ways that the decision by Britain could affect the U.S. economy.
1. It could strengthen the dollar.
Last week as investors began running from the U.K. and Europe in droves, they came to a familiar place for safety, U.S. assets.
The strength of the U.S. dollar will most likely continue, especially amid the worries of Britain’s decision. (Remember, U.K. leaving the Union is a process that will take over 2 years.)
2. It could tighten financial conditions.
Just about anytime something MAJOR happens, financial conditions tighten to help appease investors that the government bureaucracies are doing their jobs.
Will tighter financial conditions lead to more overall safety in the market? That’s to be seen.
3. It could hurt business confidence.
Janet Yellen, the Federal Reserve Chairwoman said she believes that apprehensive private-sector spending is one of her biggest worries.
“Private investment has been very weak, that’s one reason productivity growth has been so meager,” she said last week.
When business confidence is hurt and rather than spending, they are saving, that can hurt the overall economy.
All of this being said the U.S. economy is still rather healthy.
What should you do going forward?
First of all, this is where your investment plan comes in.
If you’re a long-term investor, the short-term ups and downs of the market have little to no impact on your overall outlook.
This is one of the reasons I talk so much about putting together an investment strategy. If you have no strategy; if you have no plan, in reality, you do have a plan. The difference between your plan and other’s plans, however, is that you are planning to fail, rather than succeed.
This is the perfect circumstance to prove to you the importance of having a plan and an investment strategy.
For those that do have an investment strategy, something like Brexit is merely just an occurrence of something happening in the world. Things are happening all over the world at all times of the day. Granted, this is a rather large occurrence, but in reality, it shouldn’t sway you.
The sky is not falling and the world is not over. Rather, we’re just making a journey to a different looking world.
So, rather than worrying about what will happen next, worry more about having a plan in place to navigate the rough patches.
If you don’t have a strategy, now is the perfect time to put one together. Same goes for a financial plan. If you need help putting one together, seek out help.
For those that DO have an investment strategy, for those that do have a plan for your finances, stick to that plan!
This is a short-term occurrence in the market. Just because all the talking heads on the news stations are telling you all these bad things, that doesn’t mean it’s true. They’re merely speculating like everyone else, and causing drama is part of their job description.
Invest according to the plan you’ve created, stick to the plan that you’ve devised because long-term investing and long-term thinking will more than outpace anything in the short-term.