The Impact of Russia & Ukraine On the Stock Market
Following the recent invasion of Ukraine by the Russian army, the stock markets have been in a tizzy. While the recent roller-coaster ride may have you feeling a little queasy, for those of you who have been long-time investors, this feeling of uncertainty is nothing new, and it is important to take a historical perspective.
You may have felt similar emotions in February 2020 when news about the Coronavirus broke and the global stock market crashed -34%, but had you stayed invested you would have been rewarded with a calendar year return of 16.25%1.
You may have felt these emotions in December 2018 when news about the intensifying trade war between the US & China broke and the global stock market crashed more than -12%, but had you stayed invested you would have been rewarded with a 2019 calendar year return of 26.6%2.
You may have felt these emotions in June 2016 when news broke about Brexit, sending global equities into a sharp decline, wiping out more than $3 trillion of market value3. However, investors who had stayed in the market would have made a 5% profit relative to the pre-Brexit level just three months after the referendum4.
There are plenty of examples, from flash crashes and geo-political events to outright financial disasters, such as that of the financial crisis of 2008.
So, what is the lesson to be learned from these events?
First, markets are always volatile in response to potential geopolitical events between significant actors.
Russia accounts for about 10% of the world oil exports. Any disruptions could impact the price of oil, as we’ve already seen. Just the threat of disruption has influenced markets.
Fallout from the invasion will likely be short-lived in the markets and making decisions based on emotion could be detrimental to portfolios – it’s best to stick to the plan in times like these.
Domestic issues, such as inflation and higher interest rates, may pose a greater current threat to financial plans than the war between Russia and Ukraine.
Second, trying to watch the market go up and down on a day-to-day basis is draining and leads to poor decisions.
Statistically, the S&P 500 has been positive 53% of the time if you look at daily performance. That means 47% of all trading days have historically posted a negative return.
If you check the performance monthly, the month’s return would have been positive 63% of the time.
As you can see, while there is a lot of uncertainty daily, the outcomes improve as you go from daily observations to monthly observations.
And if you look at the performance on an annual basis, the S&P 500 has been positive 75% of the time.
If you only focus on the daily numbers, you are in for disappointment 47% of the time, historically speaking.
If you look at the annual numbers, it reduces your chance of disappointment to 25%. It is important to review your investment portfolio annually, but not necessarily daily or even monthly, that is our job!
The day-to-day market volatility drives emotional decisions that hurt average investors more often than they help.
From our experience, there’s no reliable way to know when to cash out of the market or when to get back in. Statistically speaking, you are better off just staying invested than trying to time the market.
Third, we must understand how we are investing.
When we buy stocks (or mutual funds / ETFs made up of stocks), we are becoming an owner of a company. Most of the companies we are purchasing are large, sound companies with good businesses, the ability to earn income, and weather the storm.
Of course, some companies do better than others and nothing is guaranteed, so diversification is essential. We don’t want to invest too much money in any given company, because no company is immune from a downturn.
In addition, sometimes events such as the Russia Ukraine war can lead to restrictions, sanctions, and other types of market disruptions. We cannot predict when these events will occur or exactly what form they will take. However, we can plan for them by managing diversified portfolios and building flexibility into our process.
The recent conflict between Russia and Ukraine is an important reminder that geopolitical risk is a part of investing in global markets.
Fourth, we must focus on the long-term.
There are going to be bear markets and market crashes, but we can always go back to the below chart to remind ourselves that to benefit from the good years, we must remain invested through the pullbacks. It isn’t fun to see our account balances go down, but you must remember it is temporary.
And finally, be sure to communicate with us!
There is a lot of uncertainty in today’s world. While we cannot eliminate uncertainty, we can help plan for the unexpected. This is why we recommend that our clients have a Bucket Plan® in place.
If you feel that the volatility in your portfolio is too much to stomach, maybe your risk profile has changed since your portfolio was established. Please reach out so we can discuss your situation and identify if there are portfolio allocation adjustments we should be making to continue to reduce risk or volatility if you feel uncomfortable with the current risk levels.
In the meantime, let’s take a moment to reflect on all the innocent people who are in harm’s way due to the events that are unfolding and remind ourselves how fortunate we are for the lives we lead!
Please reach out to our office if you would like to schedule a time to review your financial portfolio and make sure you are properly diversified for your risk profile and financial goals.
Article adapted from Prosperity Capital Advisors and used with permission.
Sources:
1MSCI All Country World Index TR price return from 01/01/2020 – 12/31/2020. Data provided by Kwanti Portfolio Analytics
2 MSCI All Country World Index TR price return from 01/01/2019 – 12/31/2019. Data provided by Kwanti Portfolio Analytics
3 https://money.cnn.com/2016/06/27/investing/brexit-consequences-2-trillion-lost/index.html
Disclaimer:
This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities.