How to protect your 401(k) from the Brexit fallout

Closing Bell Exchange: Brexit impact on your portfolio
Closing Bell Exchange: Brexit impact on your portfolio

After global markets fell on Friday driven by concerns over the United Kingdom's vote to exit the European Union, investors are no doubt wondering how they can protect their portfolios, 401(k)s and other retirement accounts from further losses.

For Mitch Goldberg, president of investment advisory firm ClientFirst Strategy, the message that he's sending his clients is to not panic. Despite markets being down, this isn't 2008 all over again.

"It hasn't been a disaster," he said. "It's been a tough day, but we've had a couple of really good months. So we're giving some of that back now."

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When he talked to clients on Friday, he pointed out that nothing has actually changed. The U.K. is still part of the European Union, and it could take two years for an exit to actually happen.

He also thinks that once the initial shock of the vote subsides, people will realize that Britain isn't going anywhere.

"The country's relationship with the European Union will look similar to what it is now," he said. "They'll engage in pretty much the same treaties, with a few changes to maybe immigration and payments to the EU, but it'll look the same. Britain will just have more control over the process."

Bob Sewell, president and CEO of Bellwether Investment Management in Oakville, Ontario, Canada, agrees that this will be a long process and that investors shouldn't do anything drastic. He also points out most of the investment risk right now is in Europe and with companies that have significant exposure to the EU and the U.K.

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Corporate earnings on European banks could also be impacted, especially if an exit causes even slower growth than what the world is already experiencing, but he said that "the broader global impact on growth will take time to assess."

In the shorter term, investors can hedge by adding a little more gold to their portfolios. And they should hold European investments in American dollars instead of euros and pounds, the latter of which dropped to a 30-year low in the hours after the vote results came in, said Sewell.

Also, focus on buying U.S. companies that pay a dividend and generate most of their earnings domestically, he said.

People can get more defensive overall, as well. Arthur Heinmaa, chief investment officer at Toronto's Toron Asset Management International, does say that people shouldn't trade from an emotional perspective, but those who think that growth will be muted going forward should look at sectors such as consumer staples, health care and other traditionally defensive industries. Avoid small-cap stocks, which tend to be more sensitive to market ups and downs.

"You want companies that have a good demographic push behind them and are not dependent on general economic growth," he said. "The companies should have an ability to grow in any environment."

Take the defensive

As long as we don't see a general market panic — and we'll have to wait and see if any hedge funds or other more-leveraged financial institutions go bust because of this, which could stoke fears of a financial collapse, said Goldberg — most U.S. companies won't be impacted too greatly by the vote. Only 7 percent of revenues generated by S&P 500 companies come from Europe, said Sam Stovall, managing director and U.S. equity strategist at S&P Global Market Intelligence.

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If there's any impact on a portfolio, it may be that the market fall will give investors an opportunity to buy stock at a cheaper price. He thinks that people should consider buying more stock if the market falls by at least 5 percent — otherwise, we're not seeing anything more than a market dip.

Investors might consider putting buy limit orders on stocks they'd like to purchase, which is what Goldberg did in the days leading up to the vote.

These orders trigger a buy when a company's price falls to a certain level. On the more defensive sectors, Goldberg set the buy order to trigger when a stock falls by between 3 percent and 4 percent. On more cyclical industries, such as materials and industrials, stocks have to fall between 4 percent and 5 percent for the order to be executed.

He also has orders set to go off when those same stocks fall further — at between 8 percent and 10 percent and around 14 percent — so he can buy even more if markets get worse.

While investors can make some moves to make their 401(k) and other investment accounts more defensive, ultimately, people need to stay calm, stick to their plan and remember the investing basics.

"It's about diversification, quality and plain vanilla," he said. "That's the foundation of a portfolio, and it's what works."