On Thursday morning (24 February 2022) SGT, Russian President Vladimir Putin ordered a full-scale invasion of Ukraine.
Make no mistake about it this is a catastrophe as war takes a horrible toll on people.
The loss of lives and massive destruction trump any worries we have about our investment portfolios.
As I’m not a qualified political commentator, you should look elsewhere for an analysis of the war.
I sincerely hope and pray that the war will end swiftly and the casualties minimalised.
That being said, now is a stressful time for investors.
We are already seeing war will have negative financial impacts. For example, international sanctions on Russian oil will drive the prices of crude oil up and worsen fears of inflation as consumers grapple with the rising prices.
I am also not envious of central banks around trying to fight inflation. Not forgetting other stock market headwinds like the upcoming U.S. Federal Reserve’s interest rate hikes.
But fret not.
Read on what you should be doing as an investor.
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any investment product.
What Happened to the Stock Markets After Major Geopolitical/Military Events (Short-Term)
In the short term, no one knows what may happen next as there are no exact historical parallels for the ongoing Russia Ukraine conflict.
But we can’t discount how helpful examining the past can be.
The table below tracks the Standard & Poor’s 500 (S&P500) index 1 – 12 months after major geopolitical and historical events.
FYI: The S&P 500 index (or Standard & Poor’s 500 Index) includes 500 of the top US companies in leading industries. The index is weighted by market capitalisation, which refers to a company’s total number of outstanding shares multiplied by its share price. The S&P 500 index, which was created in 1957, is considered to be a proxy to the US stock market performance.
What’s interesting is that the stock market tends to bounce back 12 months after about 2/3 of these events.
But, what we can expect to see now is increased volatility in the stock market as the conflict develops. This is a signal that the stock market has not priced in the possibility of a more serious conflict.
Stock Markets Tend to Trend Upwards in The Long Term
In the long term, however, the stock markets have almost always recovered after major crises.
But, as a word of caution, this chart is only valid for the overall stock market indices and does not apply to single stocks or individual sectors.
The reason for stock market indices trending upwards over time, in the long run, is simple.
It is based on the assumption that human civilisation will continue to develop and progress over time.
As human civilisation progresses, economies will generally grow alongside too. Investing in equity will allow you to participate in this economic growth.
This is because, at a fundamental level, a company’s stock price is a reflection of its discounted future earnings.
If companies are managed well, provide value for their customers and are profitable, the companies will grow. As a result, the company’s stock price will someday increase to reflect higher discounted future earnings.
A caveat. Not all companies will be profitable and successful.
But on a broader systemic level, there will always be companies that will grow with the economy. Thus, investing in a broad diversified index fund will let you participate in this growth as although returns might not be as high, you are taking on less risk compared to stock picking as you are mainly contending with systematic risk.
FYI: According to Investopedia, Systematic risk refers to the risk inherent to the entire market or market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not just a particular stock or industry.
One more thing.
If the assumption turns out to be wrong and catastrophic events that leave the world permanently devastated break out — our investment portfolio will be the least of our worries.
What Should Investors Do
As influential economist, John Maynard Keynes once said:
Markets can stay irrational longer than you can stay solvent.
This advice rings true today as no one can tell for sure where the market is going in the short term.
But what we do know is that over the long term, the stock market trends upwards.
But if you are seeing a sea of red and want to sell everything to stop the pain, you should reconsider.
Because any moves you make in reaction to the Russia Ukraine war news will not be helpful.
In times like this, Peter Lynch’s advice is especially relevant now.
For context, renowned investor and author, Peter Lynch, ran the Fidelity Magellan Fund between 1977 and 1990.
During those 13 years, the fund posted an annual average return of 29%. It beat the S&P 500, an index tracking 500 large corporations in the US, in 11 out of 13 years.
He had this piece of advice for investors (emphasis are mine):
In the stock market, the most important organ is the stomach. It’s not the brain.
On the way to work, the amount of bad news you could hear is almost infinite now. So the question is: Can you take that? Do you really have faith that 10 years, 20 years, 30 years from now common stocks are the place to be? If you believe in that, you should have some money in equity funds.
It’s a question of what’s your tolerance for pain. There will still be declines. It might be tomorrow. It might be a year from now. Who knows when it’s going to happen? The question is: Are you ready—do you have the stomach for this?
Most people do really well because they just hang in there.
Ultimately as investors, we should commit to staying the course and commit to our long term investing strategies (provided we do our due diligence). We also need to be prepared to stomach volatility which is part and parcel of being an investor
But, if you are sleepless due to the sea of red you are experiencing with your investment portfolio, you might want to consider switching to an investment with lower risk even though it may provide a lower return.
As investors, we need to have a firm grasp of what we are investing in and ensure that the amount of risk we are taking is something we can live with.
Last but not least, we should remember that Russia/Putin’s invasion of Ukraine is cruel and inhumane. It’s times like this when we remember that money is not everything.