First off, the idea that we can spend time discussing portfolio performance in a time when human lives are at stake is a fortunate position to be in. Lives will not only be lost, but many more lives will be changed forever. We are thankful for our safety, but also aware that many are not as lucky. Unfortunately, this is our current reality.
Regarding investments, we think the following four points help clarify our thoughts as we continue to live in this uncertainty. It is natural for everyone to go into sensory overload when conflict strikes. What investors must be careful of is letting those emotions drive decisions. There is a reason why Robert Shiller won the Nobel Prize with his research on behavioral finance. Emotional decisions can drive prices farther away from what underlying economics would normally expect. Thus, these four points are an attempt to remove the emotion and think rationally about how to react.
- No one event can be viewed in isolation. As the facts change, so do opinions. For instance, the Federal Reserve gave all indications they were planning on raising interest rates and were beginning to reduce their balance sheet. However, given the recent invasion of Ukraine, interest rates might have a new path. What was driving market behavior the first two months of the year, may no longer apply. Why would the market appreciate on the first two days of conflict last week? The answer is the reassessment of economic risk. We anticipate a continued bumpy ride as short-term traders continue to sort through the new information. The reactions can be just as important as the event itself.
- Rising and falling market prices do not necessarily coincide with the timing of economic prosperity or slowdowns. Market prices are leading indicators for economic activity. Markets attempt to forecast the activity before it arrives. Thus, getting the exact timing of when markets move has proven to be a difficult financial endeavor. In addition, when investors jump in and out of the market, they must get the timing right twice. Once on the sale and once on the purchase. Interest rates began to climb this year on merely the anticipation of Federal Reserve raising rates. Investors are not only guessing the timing but also the amounts. To date, the Fed has still not raised rates. Did they have the Ukraine conflict in their original assessment back in December? Timing all events is hard.
- Unexpected events happen more frequently than most expect. Investors who react after the event has occurred are probably too late. Thus, it is best to understand your needs and plan for things happening that you can and cannot currently see. Investors have long uttered the words “but if that didn’t happen, I would have had achieved success”. Those words might provide psychological comfort after the event but will not change the financial situation. Plan for unexpected things to happen. The Russian ruble falling over 20% this past weekend is not what people typically plan for. However, it did happen and there will probably be stories of people with very concentrated bets suffering significant financial damage. Unfortunately, unexpected events happen all the time.
- Time horizons for investing matters. Matching time horizon with investments is important. Bonds during economic prosperity seem boring. Bonds during military confrontation and panics provide safety to make it to the next prosperous time. Looking at equity prices over long time periods feels different than looking at equity prices daily. We find it helpful to think of spending equity prices many years out from now as opposed to thinking of spending equity prices tomorrow.
It does feel like we are in the one of those international moments where decades happen in weeks. It remains to be seen how this all unfolds, but certainly the range is much wider after the recent events in Ukraine. With the range in outcomes increasing, diversification begins to play a more meaningful role.
In good times it can be frustrating to see a certain investment not doing well while others speed ahead. However, diversification is meant to help investors sleep easier at night knowing that one investment cannot derail their financial future. At the very least, we can be thankful that our sleep is not being disrupted by explosives.