Do you wonder if you should change your investment strategy because of Russia’s war on Ukraine? You’re not alone. The war has many investors concerned. Yet, if you’ve designed an appropriately diversified portfolio, you probably have less to worry about than you think.
Here’s what you need to know about the impact of geopolitical conflicts on investments and steps to help safeguard your portfolio against stock market volatility.
Geopolitical Events and the Stock Market
Historically, major geopolitical shocks, such as 9/11 and the Cuban Missile Crisis, have sparked initial stock market volatility. The most dramatic reactions have occurred within the first three months, with the average post-event loss for U.S. stocks at 5%.
However, the average recovery time for U.S. stocks has been less than seven weeks, and in 66% of the events, the losing stocks were higher after just one month.
Given this, you may be unsurprised to learn that geopolitical events have had little to no impact over the long term. Markets are resilient, to say the least. They have generally priced in the circumstances in short order and climbed higher.
How to Mitigate Geopolitical Risk
We think the best way to protect your investments against geopolitical crises is to avoid timing the market. Investors who sell in the initial market volatility do so at a loss. Then they face two choices: Sit on the sidelines and miss out on the market’s returns or jump back in by buying while stock prices are rising. Either way, it’s more loss.
So when wars happen (and sadly, they will), the best response is usually to take a deep breath and wait out the initial volatility. To do that, you’ll need to:
Have a long-term perspective: Creating an objective for your investments, like having enough money to enjoy a great retirement, can help you stay the course when markets get wobbly in the short term.
Know your risk needs and tolerance: You should understand your stomach for risk, or risk tolerance, so that you’re less tempted to cash out when markets experience variability.
Build a diversified portfolio: You’ll want to create a portfolio that helps you meet the returns needed to meet your goals. And you’ll want to do that without exposing yourself to no more investment risk than needed. Thoughtfully select your investments from a range of asset classes, global markets, market capitalizations, sectors, and industries. Rebalance your portfolio regularly.
We also suggest keeping an emergency fund in cash with three to six months’ worth of expenses. Your emergency fund can see you through personal crises such as job loss without forcing you to take steps like making early withdrawals from retirement accounts.
Finally, a financial advisor who provides investment management can help you understand your return needs and risk tolerance and build a diversified investment portfolio that they rebalance on your behalf. Our wealth management firm in Plantation, FL, helps clients select portfolios to achieve their goals, and when market movements create anxiety, we’re there to help coach clients through it. We suggest you seek out a fiduciary, fee-only financial advisor so that you truly know they’re sitting on the same side of the table as you.
Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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