As everyone knows, Russia has launched a series of unprovoked attacks across the Ukraine. This is an evolving situation and likely to play out over several weeks.
I want to first acknowledge that a global war and the likely humanitarian crisis for the Ukrainians is on top of mind and I hope for a quick resolution to minimize the human toll.
But as an investor and someone whose financial well being is tied to the markets it is also important to think about what this means to your portfolio during these turbulent times. They key is maintaining a long term perspective, while ensuring you act appropriately in the short term.
Most people with balanced portfolios will likely have limited direct exposure to Russia.
Indirectly though all portfolios are likely see considerable volatility over the next few weeks as markets digest developments from Russian actions and the impacts from Western sanctions.
It is likely they markets will see continued pressure in the short term as American and European allies weigh additional sanctions and actions.
How should this change your investing outlook?
At this time it should not. It is also not the time to jump right in and “buy the dip,” nor is it a time to sell and run for the hills. While the Russian invasion is front of mind now and very unfortunate from a humanitarian perspective, it has limited economic significance in the medium to long term relative to broader issues like inflation and increasing interest rates.
Unless the war extends beyond Ukraine and results in American and European (NATO) troops getting involved (not to mention China) the financial impact over the next several months and years is likely to be limited.
As the chart below shows, historically, as long as the geopolitical event didn’t coincide with or start a recession (indicated in grey below), market pain has been fairly short-term. Given the US economy is still robust and not entering recession (one hopes!) there is a good chance we follow long established historical patterns.
As you can see from the table blow, the S&P 500 was higher a year after those events in 9 of the 12 times, with an average gain of 8.6%.
What should investors do now?
The year 2022 has already begun to play out differently than the past couple of pandemic year with equity markets entering bear market territory corrections relative to previous highs.
However, remember that since the stock market hit bottom in March 2020, the S&P 500 rose a staggering 115% through Jan. 3.
With that in mind, and given uncertainty in the months ahead due to several local and global factors, it will be hard to time markets and instead a more intentional approach is more prudent. This includes reviewing your longer term investing strategy (hiring an advisor may help), diversifying further and rebalancing for a slower growth environment.
For most investors sticking to broad based index funds (with a bias towards US markets) or ultra large caps like Microsoft, Apple and Google is probably the best strategy.
During difficult times, it’s helpful for investors to ground themselves in sound investment principles. Thanks to Morgan Housel’s The Psychology or Money book, which I recommend every investor reads, here are some key thoughts to remember in times like we are seeing now.
- Read more history and fewer forecasts.
- It’s strange that you go to the doctor once a year but check your investments once a day.
- You’re only diversified when some of your investments perform worse than others.