Brexit and your personal finances

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The countdown is on! There’s less than 6 weeks until the referendum when we vote on whether or not to stay in the EU, and the Leave and Remain campaigns are becoming more heated. Increasing numbers of heavy-weight politicians and high-profile individuals are making their views known, hoping to sway the public, as the prospect of a vote to leave becomes a more serious possibility.

Following on from the intervention of Barack Obama no less, this week we’ve seen Christine Lagarde, head of the IMF, say that the consequences for the UK of deciding to leave the EU would be ‘pretty bad to very, very bad’; John Major gave a speech criticising individual Tory politicians in the Leave campaign; and Mark Carney, head of the Bank of England, reiterated his belief that an exit would damage the UK economy. The general gist is that those in the Remain campaign believe an exit would have a negative impact on the economy, possibly recession. Those in the Leave campaign don’t agree!  But what about our personal finances?

Who do we believe? Ignore everyone!

As part of my ‘year of thinking about money’, I signed up earlier this year to daily emails from the magazine Money Week. It’s clear from the emails that the magazine is pro-Brexit (British exit), and they’re currently promoting an interview with Boris Johnson, until last week London mayor, and articles explaining how leaving the EU will be good for your money. I clicked through to read the information, to find I first need to sign up for a subscription. I might yet do so, but it’s a timely reminder that they’re trying to sell a magazine, and that they’re not sending me free emails for my own benefit.

I recently read a funny, informative book called ‘Ouch! What you don’t know about money and why it matters (more than you think)’. It has a whole chapter called ‘Ignore everyone’ which explains how people in positions of power and authority, journalists, PR departments, analysts, may lie, have vested interests, and not be as expert as they seem. The Buddha quote at the start of the chapter sums it up: ‘Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense’.

Brexit and investment indecision

I’m slowly working my way through different aspects of my personal finances, and am currently ‘stuck’ following my first ever investment into a stocks and shares ISA. I’ve been asking questions and seeking advice to help me decide what funds to put the money into, and can see the appeal of putting my faith in someone more knowledgeable and experienced than me. However, no-one cares quite as much about my money as me, or knows better what I feel comfortable with and what works for me, so I need to take full responsibility for what happens to it.

One of the reasons for my investment indecision is uncertainty about the EU referendum. The economy is one of the key debates, but what impact might a Brexit have on our individual finances?

Our personal finances will affect the vote

A survey commissioned by Queen Mary University of London earlier this year showed that if people think Brexit will reduce their income, most will vote to stay. If they think they’ll be better off out, then most will vote to leave. This worked with sums as little as £25 a year, though larger sums increase the size of the majority. If they feel they will be no better off in or out, most will vote to leave. I thought more would vote according to political views, but it still shows that the perceived impact on our personal finances influences our decision to a large extent.

£4,300 better off in?

Treasury analysis claims that a Brexit would mean the economy would be 6% smaller by 2030, costing each household £4,300. The figures are based on an estimated reduced amount of gross domestic product (which is everything produced by the economy), divided by the number of households, at that future point in time once everything is settled again. It’s their forecast that the UK’s economic growth outside of the EU, compared to staying in, will be reduced by an amount equivalent to £4,300 per household. It doesn’t mean we will each see a drop of £4,300 in our household income.

How might Brexit affect our money?

No-one actually knows, but these are some of the ways in which our finances might be hit if we leave the EU. I’ve taken a few basic lessons in economics from the links below!

Falling pound – The value of sterling has fallen and is predicted to fall more with an exit. This will make foreign goods more expensive. Exports will be cheaper, imports more expensive. Air fares and holidays abroad will likely cost more, though there will be currencies with which the pound holds its own, also places such as Greece and Portugal where prices are apparently falling which might offset any falls in sterling. The flip side of us facing more expensive holidays overseas is that the UK will become more attractive as a cheaper destination for overseas visitors.

The Telegraph had a good article in February that explains why stronger economies tend to have stronger currencies. It’s partly because investors want to invest in that country’s future growth and they need the local currency to do this. This increase in demand drives up its value. It’s also partly because higher interest rates increase returns on government bonds, which attract more foreign investors. Interest rates are now not predicted to rise in the UK contributing to a lower pound.

Inflation / Interest rates – A falling pound will likely lead to an increase in inflation. The website www.economicshelp.org explains that this is partly because imports will cost more and those price rises will be passed on; and partly because our exports will be more competitive and there could be increased demand for these cheaper exports. Higher inflation means our money will not go as far, the Bank of England might increase interest rates to control this, which will result in increased mortgage costs. It will result in increased savings rates too, so this might be a benefit too!

Jobs – If you lose your job this obviously affects your finances. The Remain campaign say 3 million jobs are at risk if we leave the EU because they are linked to trading with the EU, while the Leave campaign say an exit will free business from EU regulation thus creating jobs. Business confidence is down and big businesses are hiring and investing less. Large international banks with their overseas headquarters in London are generally supporting the Remain campaign, partly as they use the UK to gain access to the European single market. The financial sector in particular is likely to be hit by a Brexit, so if you work in the City of London there could be increased job losses.

House prices – Uncertainty is affecting buyer confidence as people wait to see what will happen, some experts have said house prices could fall 5% with an exit. There has been a fall in foreign investment, especially in commercial property. This might help first-time buyers and if you feel house prices are currently too high, though some say cheap mortgage rates and a lack of supply will sustain demand this year.

Stock markets – There has been volatility in the market partly because of uncertainty, and if we leave the EU they could fall, affecting your pension or investments. I have a pension but don’t really know how this is invested (something on my list of things to check….). It isn’t preoccupying me as much as my much smaller ISA investment because I’m placing my trust in the fund manager to invest soundly on my behalf. Possibly this is a foolish attitude to take!

However, because I personally have to decide what funds to invest in with my ISA, I’m having to think for the first time about what effect politics and the economy might have on the stock market.

What advice have I seen that I like?

There are a few things I’ve read that make sense to me. Firstly, from Hargreaves Lansdown, that we shouldn’t be invested in the stock market if we can’t accept some volatility. Investors shouldn’t make decisions based on whether they think we’ll end up in or out of the EU. Life and the economy will go on regardless of the outcome, and we’ll have the same need to save, for retirement or whatever other goal we have, after the vote as before. There was advice to carry on as usual while making sure that investments are spread globally. Perhaps consider actively-managed funds where a fund manager can fine-tune a portfolio to potentially minimise near-term impact in a way that tracker funds cannot. Also possibly consider absolute return funds which aim to smooth volatility – though many fail!

This echoes a reply I saw from Holly Black in the Money Mail pages to a letter asking if an investor should switch ISA funds because of the referendum. She reminded us that investing is for the long term, and that no decisions should be made based on a vote in a few weeks, where the impact of either outcome is unknown. She likened picking funds on the basis of these predictions to gambling rather than investing, and advised if you were worried to take your money out of the market into a cash account for a few months, or into an absolute return fund designed to beat the stock market.

Investment adviser Tilney Bestinvest said the UK stock market is made up of many international companies whose performance is not that closely linked to domestic UK issues, and the solution would be a mix of funds, including some absolute return funds. International diversification would help in times of high currency volatility as now.

My conclusions?

Long term view – I’m reassured by being reminded that I’m investing in the stock market for my retirement which, at a minimum of 10 years from now, is definitely a long term commitment. It should give me time to weather any downturns. I’m definitely getting distracted by the impending referendum, but perhaps this is no bad thing if it’s making me think more carefully about what level of risk I’m comfortable taking.

Asset class – I accept I need to take some investment risk to counter the risk of inflation from having just bank savings, and I thought I was happy to place about 60% of my money into equity funds, and the other 40% into lower risk assets such as bonds. However, I’m questioning if I should be taking a more cautious stance and choosing lower risk investments because of the current uncertainty, especially as I feel ‘safe’ currently holding onto my money in cash, and seeing the comment by Money Mail about moving into a cash account for a few months if worried. Is now the right time to decide where to put my money, or should I wait a few weeks to see what happens? Should I just jump in and get going with it?

Geographical diversification – Having an internationally diversified portfolio makes sense, but the issue of currency risk when it’s sterling that is devaluing means I’m questioning just how much is sensible to hold in funds invested in the UK. I read that you should hold more of your money in your home market as ultimately you’ll want to take your money in sterling, but obviously money can be moved between funds so maybe this is unnecessary at this stage.

Passive vs Active – I was planning to put my money into tracker funds, yet here is advice saying active funds, and indeed absolute return funds which might involve what I think of as riskier practices such as short selling (borrowing shares to sell, in the aim that the shares will have fallen by the time they’re bought back), might be the answer.

I have yet to decide, and have lots of ongoing questions. The experts on each side might be right, they might be wrong! I guess we’ll know in a few years (!), but for now I’ll be watching with interest what happens over the next few weeks.

Image: Pixabay: WildOne

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