March 2, 2022 – Our reaction to the Russian invasion of Ukraine is one of compassion for all those directly impacted, and our thoughts are with you as these unsettling events unfold in front of us.
Markets were initially shocked, and volatility spiked, though later settled as the news was digested. The situation remains very fluid, and the range of outcomes is vast. During these times, markets tend to feel like a roller coaster with big swings, both down and up. Trying to predict how these events may unfold and making immediate reactions in our investment portfolios is not prudent in our view. We build portfolios with an appropriate amount of downside protection ahead of events like this, so we are prepared to act when necessary.
Many countries have banded together to put economic pressure on Russia and its ability to transact in financial markets. This has hurt Russian equity, debt, and currency markets the most. Our portfolio exposure to Russia is very limited (less than half of one percent) and our investment strategy has allowed us to hold up better than our benchmark during these recent declines.
Economists have begun downgrading forecasts for global economic growth, though it is thankfully starting from a strong fundamental position. Since Russia is such a large producer of energy (oil and natural gas) and commodities (agricultural and precious metals), additional supply-side issues have the potential to drive inflation higher in the near-term. This risk makes central bankers’ jobs of price stability even harder as they weigh how much to tighten monetary policy to tamp down already high inflation without derailing the healthy economic growth environment we have been experiencing.
In light of these developments, we recommend staying invested in your long-term plan unless something in your personal situation has changed that warrants a strategy shift. If this is the case, please reach out to your Wealth Manager. The best way to make well-thought-out long-term decisions is to avoid reacting emotionally. This is difficult during these uncertain times. Engaging in healthy activities that tend to bring you calm and peace of mind can be helpful. Looking at what history suggests can be another effective way to temper emotional impulses and respond constructively.
Unfortunately, conflicts of this nature are not new. While the immediate destruction and loss of life elicits fear, anger, sadness, frustration, or bewilderment, from a historical market view, the downside is often priced in quickly and overshoots fundamentals or common sense. While each crisis is different, we can pause and think about the World Trade Center Attacks on September 11, 2001; the Kennedy Assassination; the Cuban Missile Crisis; World War II; the Korean War; the Balkan Wars; the Vietnam War; two Gulf Wars; the War in Afghanistan; and dozens of other major events that elevated uncertainty and shocked markets. The benefit of hindsight is we can see that those who remained calm and stayed invested were rewarded as markets proved resilient. During many of these past geopolitical events, we see a relatively clear pattern of markets recouping their losses, or being higher, typically within 6-12 months. Past is not prologue, though we hope this context helps provide you additional perspective.
We work hard to earn your trust, and hope that this note helps assure you that we are monitoring the situation closely, will continue to do so, and are incorporating latest information into the decisions we make. While we know events like this, and accepting the subsequent market declines that follow, are a normal part of investment risk, we certainly acknowledge it does not make staying the course easy during the turmoil. While the fear, anxiety, and uncertainty this conflict elicits in us are real, making investment decisions based on emotion and deviating from our plan can have major negative repercussions. Sticking to a well thought out and disciplined investment process has allowed us to successfully navigate previous market shocks. We believe this adherence will continue to serve us well in this instance.
We are here to answer questions, serve as a sounding board and help in any way we can. Please do not hesitate to reach out to us.