By Shane Ostrom
Well the British decided to secede from the European Union. Did you find yourself worrying about what would happen to your investment portfolios?
This is a perfect example of how every day we are entering a crisis, in a crisis, or exiting a crisis. If you find your portfolio management has to flex to the crisis du jour, you need a better plan. An investment plan based on crisis management or the emotions stirred by a crisis is a plan that won’t work.
Good portfolio management expects the unexpected. Proper portfolio management is about managing to the risk. In this case, the risk could be considered the British exit from the EU. Tomorrow it will be a financial bubble or terrorism.
Your money serves different purposes. Some must be available for short-term needs like emergencies. Some is for mid-term needs as saving for a home. Some is for long-term needs like retirement. Another might be to generate income. Each of these financial objectives requires a different strategy of money management.
Short-term savings must be stable and liquid at all times because when you need it, it must be available for use. Sure, you aren’t making a return on your short-term savings but that’s not the point. The point for short-term money is stability and availability.
Long-term money on the other hand requires a return that allows you to offset the damage of taxes and inflation over time and earn excess returns to build wealth. You won’t be touching this money for a long time. Short-term volatility is not the point; the long-term gains are the point. For your long-term money to work harder than you, you need the Brits to exit the EU.
As mentioned in MOAA financial web articles, in order for average people to build wealth for long-term needs, the investment markets must go down. You need a portfolio strategy designed to take advantage of the short-term drops in the markets. Short-term drops are our only chances to buy at sale prices before the markets continue their constant movement upward.
So is the British exit a big deal? Absolutely. It drove down the markets so that our next contribution to our 401ks, TSPs or IRAs will take advantage of lower prices. Some expected (even wanted) a market drop (the reason doesn’t matter), planned for it, and took advantage of it.
To fill in the details of what I’ve left out in this article, search the MOAA site for “average down”, “allocation”, and ‘rebalance” and read the articles labeled as Finance in the list of titles.