8 Simple Answers to Your Questions About the Brexit

Kathryn Cicoletti  |

I'm going to explain what's happening in very simple terms. Nobody knows what is going to happen over the next few months and years as a result of this. There's not much to do right now except try to understand where your risk is in your investment portfolio. My investing motto is: if I'm losing money, I like to know that I'm losing money on, because I can sleep better at night.

I'm losing money. I'm in all stock funds.

1. What is Brexit?

A British exit from the European Union.

2. What's the European Union?

A political union that was created in 1993. It consists of 28 countries, including the UK. The original idea was to create the "United States of Europe" where countries in the Union have shared economic goals and trade agreements.

3. What's the Difference between the European Union and the Eurozone?

The Eurozone consists of the countries within the European Union that have opted to use the Euro as their currency. The UK chose not to.

4. Wait What?

The Euro currency was adopted in 1999 (after the European Union was created in 1993).

The euro was designed to ease the process of providing services, transporting goods and moving capital between euro-using nations. The goals of the euro were well thought out with the highest of hopes, but the results have been mixed.

The US uses one currency. The US government borrows money by issuing Treasury bonds. We have one central bank, the Federal Reserve. Their job is to keep the USD stable, inflation in check, and manage the unemployment rate (jobs) all by way of economic stimulation (like lowering target interest rates that banks pay to borrow and lend to each other).

But not all countries in the European Union use the euro. And a country can borrow its own money through its respective government (issuing debt) and each country can raise or lower interest rates. It was a garbled monetary system out of the gates.

5. Why Did the UK Vote to Leave the European Union?

Partially because of what I just described. It's tough to climb your way out of a recession as a "bloc" when each country has economic stimulus levers they can pull on their own, but also certain levers they can't pull, as a result of being a part of the EU or Eurozone.

The biggest reason the UK is leaving is because of immigration.

And there was no question that while the immigrants contributed more to the economy and to tax receipts than they cost, parts of Britain felt that its national identity was under assault and that the influx was putting substantial pressure on schools, health care and housing.

Any citizen of a European Union country can work in any other member country. The UK feels dragged down.

6. Why is the UK Prime Minister David Cameron Resigning and When will he Resign?

He doesn't agree with leaving the European Union. It sounds like he'll be out by October.

7. Why is this Such a Big Deal?

The UK is the second largest economy in the European Union after Germany. The British Pound is tanking. This makes it more expensive for the UK to buy things abroad. This hurts economies abroad. This hurts the global economy. Nobody really knows the impact of this yet but the uncertainty is enough to cause huge sell-offs.

8. What about my Investments?

Yeah. About those. Stocks hate uncertainty. Bonds love uncertainty (they're considered "safe"). Gold loves uncertainty (also considered "safe"). Your stocks are losing money. Your high quality bonds are making money.

Stay tuned.

You can see the original article published on Ms. Cheat Sheet here.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.

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