The recent events in Ukraine have shocked the developed and emerging world alike. Russia’s aggressive, and hostile actions have yielded widespread condemnation and threats of repercussions for Russia, the world’s 11th largest economy.
Outside Ukrainian borders, the private lives of many have been affected by these events through indirect economic effects. Investors have been watching in shock from the sidelines as their holdings in European and US companies have reacted to events.
For example, in just over two months, the value of the US stock market barometer, the S&P 500 index, has fallen by 626 points from 4,796 (3 Jan 2022) to 4,170 by 8 March 2022. This represents a fall in the largest listed US companies of 13% in just 64 days.
Commodities markets have also been rattled. Russia is a leading exporter of oil and natural gas to most of Europe. These hydrocarbons are essential to the heating of homes, the continuing operation of heavy industry, and the manufacture of many materials such as plastics.
With trade and financial sanctions weighing heavily on the supply of these resources to Europe, the prices of these commodities have jolted upward, much to the dismay of households across the world.
Energy is an input cost into the manufacture or provision of all goods and services, therefore these higher energy prices will likely feed consumer price inflation which was already showing signs of eroding the real incomes of many.
Is Now the Right Time to Change Strategy?
In times of crisis, investors will naturally ask the question of whether their investment strategy remains the right course. This may result in a fresh consultation with a financial adviser, or a personal review of their investment portfolio.
Bear in mind that any equity-heavy portfolio will likely be showing signs of distress while this review is being undertaken. Seeing numbers flicking into the red can give momentum to a decision to act simply because doing something feels more rewarding than doing nothing in the face of chaos.
Best practice investment management is conducted free from emotions or time-pressure to make a decision. Therefore, it’s helpful to use the services of a professional because their distance from your financial circumstances can enable them to reach an objective and effective decision that you may have otherwise not arrived at.
Whether it makes sense to change strategy or not will depend upon the assumptions used when building your original investment plan.
All Part of the Plan
Any financial adviser worth their salt will see market turmoil as a strong likelihood over any long-term horizon. This means that this crash, while not foreseen in any level of detail, was effectively ‘built in’ to your financial plan.
Said another way, the rates of return often quoted for stock market investments include the anticipated effect of occasional downturns, recessions, or market shocks.
If this was the case when your financial plan was built, then actually being bumped into a seismic investment event is part of the journey and should not require correction.
This isn’t to say that an investment manager will refuse to touch a portfolio during a downturn. They may still reach the conclusion that some asset classes or individual investments appear to be overvalued in the circumstances, and that a rebalancing of your portfolio away from those assets may be warranted, but it is unlikely that your funds will exit the market entirely.
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