Our prayers and thoughts are with the Ukrainian people who are suffering immeasurably at the hands of the Russian military today. To characterize this as "geopolitical risk" that will impact our portfolios seems insensitive. Millions of Ukrainian people woke up today with plans to go to school and work, meet up with friends, or start vacations, and instead have bombs falling on their cities as Russia commits to war on their land.
Although we are thousands of miles from Ukraine, we will suffer equity losses in our investment portfolios and higher energy costs for a period. We will recover from both hardships in a reasonable period, and life will go on for most of the world, but Putin has changed the narrative for world leaders going forward. Anyone born before 1970 remembers the Cold war between the East and the West and how we lived with uncertainty daily for our security and peace. But World War III never happened. Even though we can rationalize that this is a geopolitical event and will eventually work itself out and the markets will stabilize and recover, we can still feel like panicking.
It's a little like hearing the pilot say, "Fasten your seatbelts, we expect some turbulence," during a flight. If you are fearful of flying, you may tense up, your chest tightens, and you wish you were not on the flight. However, at 30,000 feet, you are not getting off the plane, so you ride it out.
With the stock market down over 2% this morning, you may feel like that now.
It wasn't that long ago that the global pandemic dominated our concern with the uncertainty of COVID19. Over the five-week COVID correction from February 19, 2020, through March 23, 2020, the S&P 500 was down 33.9%. It has been easy to be a long-term investor from March 23, 2020, to February 22, 2022, with the S&P 500 rallying over 74%.
It is hard to see the other side of this crisis while "Breaking News" headlines in red dominate financial news media. Still, history has shown us that geopolitical risks do not last very long, and markets do recover quickly following their resolution.
These three points are essential things to remember:
We have been here before. Maybe the cast of characters is different, but the story is the same.
Markets have always recovered after a correction or bear market, whatever the cause.
A crisis in financial markets is a buying opportunity for the long-term investor. If you don't need to spend your money within the next five years, your capital is long-term.
Here is the proof:
Since 1980 there have been 33 market corrections and bear markets in the S&P 500 (See the table at the end of this post for the facts on all 33 corrections).
The average market correction was an 18.8% drawdown.
On average, the 1-year return following the market bottom was 24.8%.
On average, the 2-year return following the market bottom was 37.4%.
Year to date, the S&P 500 is down a little over 10%, and because of the Russian invasion, we may enter a bear market, which would be a fall of about 20%.
So, what do we do now?
Sit tight and fasten your seatbelts because it will be a turbulent ride for a while. The world is not falling apart, and we will get through this.
Looking back on history, the best time to buy stocks would be at market drawdowns when you feel like you want to bail out. Research from Morningstar shows that from 1993 to 2021, if you followed the herd and invested during the 20 most significant inflows of cash going into equity funds, your following average three-year return was about 5.5%. On the other hand, if you were against the herd and invested during the 20 most significant outflows of cash leaving equity funds, your following average three-year return was about 15%.
The only way to achieve long-term returns that beat inflation and put you in the best position to accomplish your goals is to be a long-term investor. The stock market is not your enemy. It is functioning as expected.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.