I was up late last night thinking about the British Exit (Brexit) and what it means for me and my investments.
Ok, that’s a lie. I was actually binge watching Game of Thrones season 6, which I have been saving up. When I was ready for bed, though, I noticed the British actually voted to leave the EU.
Leading up to the Brexit vote, people would ask me what I thought would happen if Britain voted to leave the European Union.
I thought if they voted to stay, I’d see a moderate bump in my stocks then everyone would forget about it. If they voted to leave, though, I’d see a decent drop followed by a long period of uncertainty. I also figure that real estate might see a decline as well – read this article about investing in British and European real estate.
How to Make Money from the Brexit
As many of you know, I prefer real estate to the stock market, but, as the saying goes – never let a crisis go to waste. Days like today are exactly why I keep some money (a very very small percent) in the stock market.
Let’s put our personal opinions aside and focus on how we can make money.
I believe the best time to make money is when the market is ‘jittery.’
Learn from The Market Collapse of 2008
Back in 2008 after Lehman collapsed, I had about 20k evenly split between a conservative fund and an aggressive fund.
Everything was fine until I was shedding thousands of dollars at a time in value.
Fortunately, I had read a book several years earlier called “Beating the Street” by Peter Lynch. He put out an idea that every time the stock market drops by 10%, you should put more money into it.
So the market went down 10%, and I moved money from my conservative fund to my aggressive fund.
And the market continued to go down and it magnified my losses.
So I moved more.
And it continued to go down.
…and I did it again.
I actually did this 4 or 5 times until I had nothing left in my conservative fund, and I had lost $10,000 in value.
I wasn’t happy.
Then something happened – stocks went back up. I had returned back to even just 6 or 7 months after the crash happened.
Use Dollar Cost Averaging to Take Advantage of the Brexit
The market was irrational and dropped far more than it should have. By buying when the market was down 40%+, I was able to bring the cost of my average position way down. When there was even a small rebound, I was back to even.
I expect the market will be completely irrational today and in the following months – so you can be on the lookout for deals. Here are a few big areas to be on the lookout for great deals.
1. British Pound
The pound is at a 31 year low. Now, I don’t believe Great Britain is at a 31 year low compared to other countries, so the value is probably based on fear.
When a currency value is low, the country becomes more competitive with it’s exports. It’s also cheaper to vacation in that country. So, I’d expect to see short-term increases in exports and tourist spending – giving a nice bump to their economy.
It’s also a fact that the UK gains roughly 30% of its GDP from exports (the US is around 13%). So anything that improves exports should have a huge affect on their economy.
This needs to be balanced against the fear that Britain will lose access to mainland Europe. London is the worlds largest foreign exchange market, and any fear they might lose this status could have massive effects on not only the UK economy but the entire world financial system.
Fortunately, nothing has actually changed yet. The fundamentals today are the same as they were yesterday and are unlikely to change anytime soon. I don’t think the UK will lose a few hundred years as #1 with a non-binding vote.
I think they will negotiate access to the EU market; The EU needs the UK and the UK needs the EU. It’s impossible to think that they will try to punish Britain when they will also be punishing themselves.
I think the fear will subside and markets will return to normal, especially once any news about the new status-quo emerges.
So buying anything that is Pound denominated as well as buying stocks related to tourism or exports may be a good idea (or buying stocks of companies that have British holdings in these areas). When there is a rebound, it probably will rebound hard.
2. American Stocks
American stocks will suffer today and in the coming months as the markets over-react to this news. I don’t think any rational person believes that Britain will throw up massive trade protections against the United States any time soon, so sudden drops in our stocks is probably irrational.
- Electronic equipment: $7.8 billion
- Pharmaceuticals: $5.6 billion
- Machinery: $5.5 billion
- Oil: $3 billion
- Vehicles: $2.2 billion
Like I said, I don’t think the UK will suddenly become protectionist against the US, any good companies in these sectors that see sudden drops today or over the coming weeks may still be strong buys.
How will the Brexit Affect Real Estate
There are a lot of news reports coming out that the Brexit could cause the luxury real estate market to heat up in the US. I definitely can see luxury markets such as Miami and New York getting a bump from international money. Miami really needs it too since their luxury market has been taking a hit.
Hopefully, if international money flows to the safer U.S. instead of London, it could help improve the market and keep the market on the rise.
I wrote another article if you are interested in making a play on British or European real estate.
What I’m Wary of After the Brexit Vote
Many of the continent’s stock markets took massive hits: France – 8%, Germany 7%, Italy & Spain 12+%. I think the market is right to fear for the economy of Europe far more than it should worry about Britain.
This vote could stoke more calls to exit from other nations. Should other countries decide to leave, it could unravel the EU experiment and would have an out sized effect on the mainland economies.
You may be able to find some short-term plays on the European continent, but I’d personally avoid them until the dust settles and we discover if the EU will begin to unravel or not.
How I’m Playing the Brexit
I’m not a huge stock picker, and I’ve often thought about exiting the market completely. Unfortunately, I do have almost 0.5% of my wealth in the stock market (that’s not a typo).
I own an aggressive fund from USAA (around 25% of my stocks) and the rest are in an S&P 500 index fund. I’ll put in an order today to buy some S&P 500 stocks due to the 3-5% drop I expect to see today, then evaluate the market moving forward.
*Update 6/27/16* I got my order in on Friday and took advantage of the drop in the S&P 500 of 3.6% due to what I think is irrational over-reaction to the Brexit. If I see another drop today with no rebound, I’ll get another order in before the close of trading.
My plan was to cash out and buy some real estate with that money, but now I’m not sure if I should wait a couple months until this plays out… I only kept it in because I didn’t actually think the Brits would vote to leave.