How will the Russian Invasion of Ukraine Impact my Investments?

After months of speculation, last week Russia launched a series of coordinated attacks on key military targets across Ukraine. Since the initial invasion, sanctions have been levied on Russia by several countries, Ukraine has steadfastly defended its cities, and talks between Russia and Ukraine have occurred. The situation remains fluid. Naturally, investors are wondering what this means for their savings.

How is this Impacting Global Markets?

The reaction in the equity market has been somewhat surprising. Immediately following news of the invasion last Thursday, U.S. markets fell notably at the start of trading. But they ended the day in positive territory. In short, stocks are volatile. But history shows us that volatility around events like this is often short-lived.

Stocks have been choppy since the start of 2022, thanks not just to tensions around Russia and Ukraine. Investors have also been questioning valuations – particularly for growth stocks. There’s also the anticipation of higher interest rates beginning this month. In the face of all this uncertainty, the MSCI All Country World Index is down roughly 9% from its 52-week high. Maybe that sounds concerning, but “typical” is actually a better characterization at this point. Remember, the average intra-year decline going back 40 years is right around 14%.

So, What Should Investors Do?

As we see it, investors have three options in the face of market-rattling uncertainty:

  1. Reduce risk to limit losses assuming markets continue to decline
  2. Increase risk by buying assets at cheaper prices
  3. Stay the course, consistent with a long-term strategic approach

Each option has pros and cons.

Option #1: Reduce Risk to Limit Losses
At Heritage, we build diversified global portfolios that include stocks, bonds, real assets and, when appropriate, alternatives and private investments. We structure asset allocation in line with each client’s overall financial plan and to support spending needs without having to sell a meaningful amount of stocks at a loss when markets decline. The diversification we employ reduces risk from any single equity market and we do not maintain concentrated portfolio positions. We recognize that taking the path of risk reduction comes with an opportunity cost, because at some point, markets will rebound and investors could be left with too conservative an allocation, causing them to miss part of the recovery.

Option #2: Increase Risk to Buy Assets at Cheaper Prices
“Buying low” is a great way to make money long term, which makes this option tempting. However, if investors increase risk too early, it could exacerbate losses on a greater decline. Good investors, with a diversified portfolio, frequently choose this path, but the hard part is determining exactly at what level to increase risk. We will discuss this option further below.

Option #3: Stay the Course
This reflects the strength of a long term prudent and successful investment plan. It historically works, since markets have rewarded patient, disciplined investors who accept the ups and downs of the markets while strategically rebalancing their portfolio when opportunities arise.

What Are We Doing in Our Clients’ Portfolios?

We choose a combination of options #2 and #3. We don’t want to jump into a modest decline, such as an average calendar year -14% “correction”. However, when you get to a more substantial pullback or bear market, such as a 20% to 30% drop, these have historically presented excellent buying opportunities. At these levels, you will rarely regret adding to equities with a long-term perspective.

This is exactly the approach we used during the Pandemic-Driven bear market of 2020 to our clients’ benefit*.

At Heritage, we aim to deliver sensible and prudent investment strategies to stand the test of time while accounting for inevitable market declines. We’re here to help you look past the short-term headlines and noise in the media that can side track non-disciplined investors and instead focus on meeting your financial planning goals and achieving sound long-term investment results. If this approach sounds right for you and you aren’t working with us already, let’s talk.

*Past performance doesn’t guarantee future results.
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