In my years as a financial advisor, I was always struck by clients’ perceptions that in the past, the world was calm and they could count on markets to reliably go up, up, up.
In truth, geopolitical tensions and domestic economic developments have always caused market volatility. Despite the ubiquitous feeling that the world is a more unstable and dangerous place than in the past, history shows that wars, economic downturns, the Great Depression and yes, even pandemics – like the one from 1918 through 1920 – affect markets.
But as humans, we’re wired to believe we live in the worst of times.
Now, I know some of you probably feel that way, and may even be irritated with me for suggesting we’re just living through the latest turbulent chapter in world history. But if you take away the emotional component and just look at market performance over the decades, you can see: Market volatility is a constant.
Russia’s invasion of Ukraine is a reminder that geopolitical risk is just a reality of investing.
It’s not always easy to remember, but risk and reward are related.
The greater the risk, the higher the potential for gains or losses. Equities are a riskier asset class than fixed income, meaning stocks bring more gains, but also greater losses. Without the uncertainty inherent in markets, you wouldn’t have the potential for rewards.
Geopolitical events like military conflicts or economic downturns affect stock markets in many ways and are not necessarily just negative. These events are typically widely followed by investors.
Remember: The market is a discounting mechanism. Prices quickly incorporate expectations about the effects of these events. Rather than trying to guess where prices may go, it’s best to just rely on currently available information.
As I’m writing this, markets declined at the open on news of more sanctions against Russia, but stocks rallied in the hour after the open.
One of the most effective ways to mitigate the risk of unexpected events is through broad diversification and a flexible investment approach.
This is why the ETF Strategist portfolios all feature stocks and other asset classes from around the globe, representing various market caps. This approach can help you weather a multitude of crises, including social unrest, natural disaster, and yes, war and pandemics.
In recent days, the U.S. and other Western governments issued broad new sanctions directed at Russia. Markets outside of Russia remain open and functioning, and for most Americans, Russian stocks are a very small component of their overall holdings, only included in global funds.
So for now, the portfolios remain unchanged, as we were fully diversified going into this week. Of course, if the strategic portfolio allocations drift significantly from their current percentages, we’ll send out a rebalancing alert.
In the Undiscovered Portfolio, it’s more likely you’ll see some trades in the coming week, so stay tuned for those alerts.