Why Brexit won't Impact Your Investments

Despite the apocalyptic rhetoric, the Brexit won't tank your investments

Brexit is the term coined for the UK leaving the EU. The vote, however, is just the beginning. 

Brexit is the term coined for the UK leaving the EU. The vote, however, is just the beginning. 

Over the long-term, Brexit is not likely to have have a significant impact on your investments. A lot of rhetoric would suggest that Brexit will be a massive damage to the world economy.

One of the most inflammatory statements came from the European Council President, Donald Tusk. "As a historian I fear that Brexit could be the beginning of the destruction of not only the EU but also of western political civilization in its entirety."

When putting the Brexit into its proper perspective, however, the news isn't anywhere near as bad as what the news says. After the Brexit vote stocks may have fallen dramatically, but they recovered just as fast. A week after the vote, both the London FTSE All Shares index and the S&P 500 index were back to their pre-Brexit numers. Over the long-term, neither your U.S. investments nor your international investments will be impacted in any significant way.

Impact on Your U.S. Investments

U.S. companies are likely to be unaffected by the Brexit, as international exports won't be affected. Brexit will not substantially change U.S. trade relations with the EU, and trade agreements currently in place will remain in effect. It is also highly unlikely that EU citizens would buy less products from American companies as a result of the Brexit. If anything, they might punish UK companies by buying less of their products. Although that is an unlikely scenario, it would only help U.S. company sales.

U.S. companies will also continue to sell to Great Britain in much the same way as to the EU. If anything, the U.S. may have opportunities to enter into more favorable trade agreements with an economically sovereign UK.

Let's say, however, that the UK exiting the EU meant the end of Great Britain. That the entire island-nation disappeared from the Earth. I know that's as close to impossible as it can get, but let's look at the absolute worst-case scenario. U.S. company overseas sales equal more than $2.4 trillion. The UK makes up just $55 billion of those international sales. The complete destruction of the UK will lower U.S. overseas sales by less than 2.5%. Definitely not the dire economic catastrophe that some might predict. Considering that U.S. companies sell most of their goods within the U.S. boarder, a non-existent UK would likely result in a drop in sales of less than 1/2 of 1% for U.S. companies.

Impact on Your International Investments

Your international stock portfolio may be temporarily upset, but over time, your investments in international equities won't be significantly impacted by Brexit. EU companies will still sell their goods to UK citizens, and people within EU countries will still buy products made by UK companies. Additionally, the entire EU, Great Britain included, only makes up 16% of the world's imports and exports. Even if the entirety of the EU economy collapses, the impact on an internationally diversified portfolio wouldn't be catastrophic.

The EU's Economic Loss

Despite what some headlines would suggest, the economic loss to the EU by Brexit isn't that significant. The news likes to say that Britain exiting means the world's fifth largest economy is leaving the EU. That sounds like a big deal, and it would be if there were only 10 countries in the world. But there are over 190 countries.

Great Britain doesn't make up 20% of the world economy, nor even 10%. Great Britain makes up less than 5% of the world economy. Don't get me wrong, the 4% of the world's economy the UK represents will definitely be hard for the EU to lose, but it's not anywhere near as dire as the 'fifth largest economy' headline would suggest.

The UK's Economic Loss

The UK will be looking at some significant work to transition out of the EU, but that won't mean the UK is going to shrivel up and die. There will be some difficulties for their economy, but ultimately the impact on UK businesses will be negligible. No matter how annoyed the EU leaders are with the UK, the two economies will still be primary trading partners with each other.  

The Switzerland Model

To see how the UK economy would interact with the EU, one can look at Switzerland as possible an example. The Swiss seem to always be completely separate from European affairs despite being smack dab in the middle of Europe. Switzerland is a non-EU country, but still does approximately 400 billion Euros in trade with the EU. Switzerland does this through a series of Bilateral agreements between themselves and the EU. The UK exiting the EU doesn't mean they are cutting all ties with Europe, it just means they will do it through trade agreements rather than participation in the EU.

The Specter of Further Exits

The Brexit will have short-term effects on the world economy, but the long-term investor is likely to see this as an interesting story to tell their children, not as the cause of lost wealth. This assumes, of course, that Brexit doesn't trigger other European county exits. If that starts to happen, the European experiment could come to an end.

Even the demise of the EU won't spell the demise of your investments. The world economy will still find a way to work, and EU countries will still tradde with the U.S. and each other. But a collapsed EU will likely mean a much more prolonged adjustment period for the world economy. As a result, the economy could suffer slower growth for a number of years. Even then, though, we are looking at slower growth, not economic collapse. Learn More About Brexit on PurposefulFinance.org

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