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By Brian Butchart*
The invasion of Ukraine by its much larger and aggressive neighbour is a timely reminder to investors that markets are in turmoil all the time. They’re not always as volatile as during war time, but every long-term graph of equity (and other) markets shows a steady rise punctuated by occasional stutters and brief recoveries.
What we’ve seen in the past few weeks is one of those stutters influenced by geopolitical events well beyond our control. And over the past year, fears about COVID’s lingering effect and rising inflation have put the brakes on what had been a rampant recovery after March 2020’s 30% fall.
Even in hindsight, the pressure on markets can look horrifying. But only if the lens through which you’re looking is the last few months.
This is an incredibly short period of time over which to gauge the success of your investment strategy. Short-term moves are always going to be exaggerated, just as we saw the uncharacteristically strong recovery in 2020.
Judging 2022’s returns against 2021’s is just not an accurate reflection of how your portfolio will perform over the next 5, 10 or more years.
If I may be so bold, the response by the people of Ukraine offers the ideal blueprint for how you can respond as an investor to market turmoil.
Be steadfast in the face of adversity
Ukrainian President Volodymyr Zelenskyy has reframed what real leadership looks like, often using social media to send messages of solidarity and strength to his people. Not surprisingly, it has galvanised ordinary citizens into action that has slowed the effectiveness of the invasion.
And while many have fled, many more have stayed to defend what they believe in.
As an investor, you need to adopt a similar resilience against adverse events. Fortunately, financial turmoil doesn’t involve the devastation and loss of life seen in Ukraine, but cutting and running will do more harm to your portfolio than sticking it out.
Now is the time to stay calm and invest according to your long-term objectives. History has shown that geopolitical shocks such as these provide buying opportunities for investors. The table below shows how the US stock market has performed 12 and 24 months after a correction
Now is the time to “buckle up” and brace for the volatility, if you sit it out chances are better you will reap the rewards in the long term.
Plan and be prepared
One of the most confounding aspects during the early days of Russian advance was that cities and citizens didn’t simply surrender. They put up a resistance built around clear plans and citizen action that included making home-made weapons and training with wooden cut-outs of rifles.
That preparation appeared to pay off, allowing the country’s defence forces to hold off the invading forces.
The lesson here is that you can limit the damage to your portfolio by shoring up your defences against possible downturns. That you can do through a proper diversification strategy across different asset classes, investment styles and geographies.
(You must look to the long term. Understand how your portfolio is constructed and how diversification is helping you weather the storm)
Look to history
A country like Ukraine has experienced a tremendous amount of conflict throughout its history, especially the past eight or so years of low-scale war since Crimea was annexed by Russia.
However, the country has a long history of its people standing up against oppression to declare their independence dating back to 1991. This was followed in 2014 by a public uprising that saw the overthrow of a dictatorial president. The resistance that many volunteer citizens are putting up should therefore come as no surprise given their long history of declaring a desire to live freely in their own country.
Similarly, we need only look back on the historical performance of equity markets over the past number of decades to see scattered highs and lows, but still a steady upward rise.
This long-term perspective is crucial to preserving your wealth and not squandering it if you’re spooked by short-term events or volatility as the longer-term picture for global equities illustrates.
Remain resolute and united
The leadership shown by the Ukrainian president shows what can be achieved when you’re able to rally people around a common cause. The united front they have shown has rallied world leaders to spring to action, and volunteers to flock to the country to help.
Your support as an investor comes from your financial advisor or whoever you trust with your financial affairs. It’s true that two heads are better than one, especially when one of those is qualified to give you advice based on fact, not whimsy.
The people of Ukraine are showing incredible courage in the face of such adversity. You should exercise the same determination and long-term vision to stay the course because volatility is unavoidable in global equity markets, but the only way to beat inflation and create long-term wealth, far outweighing any immediate sense of relief.
- Brian Butchart, CFP®, is the Managing Director for Brenthurst Wealth Management and can be contacted at [email protected].
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