Freaking out over Britain's vote and plunging markets? Here are seven things you need to know.
Nobody saw it coming.
Britain has voted to leave the European Union, and shock waves are hitting markets worldwide. As I write this, an hour before the U.S. stock market opens, European and Asian markets are down 4 to 10 percent, and the U.S. stock market looks like it will open down by about 3 percent.
The fact that global markets would plunge based on Britain leaving the EU may seem odd to investors here. Why does it matter to us whether Britain stays or goes?
One reason: Britain serves as the de facto European financial headquarters for many U.S. firms, especially banks. Since Britain is not going to be in the EU, U.S. companies will have to find new headquarters, increasing both costs and complications of doing business in Europe.
Another reason is the negative effect the Brexit (short for “British exit” from the EU) will have on the British and European economies. Some experts are predicting a British recession as a result of the Brexit vote, as well as a drag on the entire EU. Since Britain and the EU are huge U.S. trading partners, that could translate to slower sales for some U.S. companies.
There’s also the fear that since Britain has abandoned the EU, other member countries may follow and the entire EU — by some measures the world’s largest combined economy — may ultimately dissolve,
But the primary reason what happens there affects us here is more subtle. It’s simply that with every passing day, the world becomes more interconnected. That’s why our markets have fallen several times over the last several years as Greece, a country with a relatively tiny economy, was stricken with debt problems.
The simple fact is that, like it or not, when markets anywhere sneeze, others are likely to catch a cold.
That explains how we got here. But now for the important question:
What’s an investor to do?
As you read this, our market will most likely be going south, taking at least some of your 401(k) or other nest egg with it. Should you sell?
The short answer, at least if you’ve invested sensibly, is no.
Stock market corrections, whatever their catalyst, are not only common, they’re healthy. And while the cause of this decline was unexpected, the decline itself isn’t. We were overdue for a pullback.
So if you’re investing for the long term, especially in monthly installments in a retirement plan, keep doing so. True, the world is a less optimistic place than it was yesterday. But it’s not coming to an end.
That being said, falling prices are never worry-free. Fear of losing money is something we all have to confront when investing in anything other than an insured bank account. It’s natural to be concerned when the market gets scary, and this is a scary time. Which makes it the perfect time to review our rules to overcoming investing fear.
The 7 golden rules of overcoming fear
From buying a house to skydiving to asking someone out on a date, fear is not your friend. Here are seven universal principles that will help keep it to a minimum:
1. Understand what you’re doing
If you’re going to invest in stocks, invest your time before investing a dime. Talk to someone you know who has more experience. Learn what makes markets, and stocks, move up and down. Studying history will help you understand and predict the future.
So will understanding the rules of the game. And one rule of this game is that stocks will go down as well as up.
There’s an inverse relationship between knowledge and fear. The more you know, the less afraid you’ll be.
2. Understand why you’re doing it
With conviction comes courage.
Investing in the shares of great American companies has historically been a smart thing to do. And investing when others are running for the hills has proved smarter still.
You know that the stock market offers more risk than insured bank accounts, so it follows that if it didn’t return more over time, it wouldn’t exist.
I’m convinced a part of my savings belongs in stocks, even though I’m well-aware of the risks involved.
3. Don’t overdo it
If you want to scare yourself to death when making investments, then try any of the following:
- Invest money you’ll soon need.
- Invest more money than makes you comfortable.
- Put your money in silly, speculative stocks that are more gambling than investing.
Staring at the ceiling at night? This is probably why.
4. Expect some pain
The potential upside of good markets outweighs the potential downside of bad markets. That’s what keeps us in the game.
I have a significant proportion of my net worth in stocks, so I know how it feels when things go south. But the decades I’ve spent as an investor have taught me to expect the bad with the good.
If it were all wine and roses, anybody could do it.