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Like all Americans, I am incredibly sad and scared for both the Ukrainian people and, quite frankly, the Russian people. Russian President Vladimir Putin’s unprovoked, full-scale invasion of Ukraine has rocked the globe and has resulted in needless death and destruction.
This war could have lasting consequences for investors in stock, bond, and commodity markets and start a new Cold War between Russia and America.
Typically, geopolitical events don’t impact the markets for very long. If you look back at the Gulf War, which was sparked by Saddam Hussein’s invasion of Kuwait, oil prices and the stock market recovered quickly once it became clear that the conflict would resolve rapidly.
There are a few reasons why markets are not traditionally affected long-term by these types of military incursions.
First, traders figure out how to hedge the outcome, and second, markets are the best discounting mechanism ever created. I suspect this will be the case with Putin and Ukraine too.
Having said this, Putin is a wild card for the markets and the world. So, if you can’t sleep at night because you’re worrying about your portfolio and more, here are a few strategies you can consider in the short run.
Revisit Your Time Horizon
There is an adage that is particularly true today: it is time in the market that makes you money, not timing the market. In other words, as Beacon Pointe’s chief investment officer, Michael Dow likes to say, “Volatility is the price you pay for long-term wealth.” It is difficult to be an investor during bear markets. If your time horizon for withdrawing funds from your portfolio is less than five years, adjust your asset allocation, so you aren’t obsessed with whether the markets are up or down every morning.
Asset Allocation
While equities provide substantially greater returns over the long run, you need to be comfortable with the amount of risk you are taking to determine the appropriate asset allocation. This could be a 50% to 70% allocation to equities and the remainder in bonds and alternative investments. The more diversification, the better, because this will lower the volatility in your portfolio and increase the likelihood of achieving the best results.
Targeted Investments
Changing market conditions present different opportunities for investors. Right after the financial crisis in 2008-2009, dividend growth stocks performed well thanks to a low-growth, low-interest rate environment. After 2018, the best place to put your money was in fast-growing digital economy companies. Today, with higher interest rates caused by inflation, you might want to invest in companies in the financial, industrial and energy sectors that tend to do well in rising high-interest rate environments. Markets change all the time, so you need to adapt and be flexible with what works given each unique investing environment.
Cash to Pay the Bills
Investing is all about being comfortable with what you have. You should invest as much as you can in your 401(k) every pay period. Also, if you can afford it, open a Roth IRA or traditional IRA and contribute the maximum amount you can every year. After you do these two things, invest any excess money you have left over once you have six months of living expenses saved. You need to be comfortable living through a few 20 percent to 50 percent selloffs along the way. Having enough cash to pay your monthly bills for six months will allow you to do that.
Like getting old, investing is not for wimps. You need to have the mental fortitude to avoid checking your account values hourly or daily. Personally, I do it every three months. There will always be something to worry about when investing. Having done this for almost four decades, there has been a crisis of some sort every few years. And yet, the market continues to go higher decade after decade.
Fred Taylor is a managing director and partner of Beacon Pointe Advisors’ Denver office. He helps individuals and families build wealth, live off their wealth and leave a legacy for future generations. A former economic advisor to Governor Bill Ritter, Fred has more than 35 years of financial services experience.
