When a majority of Britons voted to leave the EU last week, it set off a wild ride for global stock markets. Investors worldwide lost $3 trillion over two days before recovering $2 trillion over the following three days. The U.S. market has returned to positive territory for the year — but the sharp swings may have left some investors uneasy about their 401(k)s and other retirement accounts.
Here are six things to keep in mind if the Brexit vote has you nervous about your retirement nest egg.
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1. Don’t panic. While wild fluctuations in the aftermath of a major shock like Brexit might make you want to sell, sell, sell, it isn’t wise to react rashly, says Gary Schatsky, president of ObjectiveAdvice.com, a New York-based financial advisory firm. Someone who sold shares after the market had suffered two days of steep losses missed out on the ensuing rebound.
“Hopefully, more people will take a deep breath, and take a look at their whole allocation to ensure their risk tolerance is objectively and subjectively managed properly,” Schatsky says.
While he does not recommend ignoring your 401(k) statements, Schatsky advises taking a calm look at them alongside your other investments so you can make an informed decision about your next moves.
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2. Use this as an opportunity to reassess your financial health. You should consider Brexit a welcome jolt if you haven’t thought about your overall financial health this year. “This should be a wake-up call to reassess your financial world,” said Schatsky. “How are you investing your money, and are you saving at a reasonable level? Have you planned for the future or has everything been on autopilot until there’s been an aberration in the market?”
Don’t just look at individual accounts. Try to get a holistic picture of your finances, including 401(k)s and other savings. “It’s all retirement money,” Schatsky says, “so when dramatic things happen, you want to take stock of how your overall allocation is, tax moves that may be advantageous, and perhaps some imprudent investment decisions that you haven’t paid attention to.”
A sober review, including a look at your overall asset allocation and risk level, may also involve checking in with a financial advisor to find out more about investing options that work best for you. “Given that it may take several years for the specifics of Brexit to play out, and markets may be rattled as plans take shape, investors’ best protection is to hold a portfolio that is diversified across asset classes and regions,” fund giant Vanguard Group wrote in a special note to its investors.
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3. Check up on your cash, too. The renewed volatility is a good reminder to make sure the money you need for the short-term isn’t at risk. Jacob Wolkowitz, chief investment officer at Minneapolis-based Accredited Investors, recommends that retirees should have enough cash to support living expenses for 18 to 24 months. And advisors typically recommend that investors who aren’t yet in retirement should have enough to cover six months’ worth of expenses.
4. Understand that volatility comes with investing. Owning stocks is critical to ensuring the healthy growth of retirement plans, advisors say. Stocks bring higher returns over the long run, and jolts along the way are not unusual. “What comes with investing in the market is volatility —and market dips are part of the ride,” wrote Lisa Kiplinger in USA Today in the aftermath of the Brexit vote.
In times of market volatility, it’s best to stay patient and ride things out. “Clearly, we’ve been through quite a bit the past seven years,” he said. “There were a lot of prognostications of [market] doom, and none have turned out to accurate.”
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5. Don’t rush to buy, either. You may have heard that the aftermath of the Brexit vote is a good opportunity to take advantage of lower stock prices. “You keep putting money in, and when stocks dip in price, you are essentially getting to buy more of those stocks for the same dollars that previously purchased a smaller amount,” wrote Jill Cornfield on bankrate.com.
Trying to time the market can be risky, though. Ultimately, the decision to buy shares or not should depend on the stock in question and the investor’s own risk tolerance, says Schatsky. Wolkowitz says he is advising clients that the jury is still out on whether it’s a good time to buy. “We don’t think equities are inexpensive enough to compensate you from the political risks in this period of negotiations between the U.K. and EU,” he said.
Europe could still deliver other shocks, too. Wolkowitz points out that Italy’s referendum on EU membership will take place in October, and the EU membership debate is already influencing campaigns for French and Dutch elections next year.
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6. This may be a good time to get a mortgage or refinance. Mortgage rates, which had been expected to climb in the coming months as the Federal Reserve raised its key rate, have instead fallen to three-year lows. They’re expected to stay low, too, as the Fed is unlikely to push ahead with rate hikes in the short term given the uncertainty created by the Brexit vote.
