Russia’s invasion of Ukraine is a tragic event that is affecting people’s lives in many ways.
The loss of human life is the real story. Innocent civilians and military personnel are needlessly dying. Normal life has been massively upended in the war-torn cities. In addition to the direct effects of physical injury and death, there is a shortage of food and water and a lack of access to funds.
The effects of the war are rippling around the world, impacting every economy and all markets. As the story is reported, it is difficult to sort fact from fiction, but uncertainty about the future reigns supreme. And it is uncertainty that financial markets loathe.
Heading into this conflict there was already nervousness about the direction and magnitude of interest rates. There was the continued fear over the persistent increases in inflation and supply chains still being locked up. War only magnifies these problems and adds uncertainty about how they can be resolved in the near term.
It is this near-term uncertainty that puts investors on edge and adds to the volatility in the financial markets. How investors respond to these uncertainties is key to beneficial long-term results.
Create a Plan to Ride Through the Cycles
Many investors tend to panic, fueled by the fear-mongering of the media and making poor short-term decisions that can rob them of their desired long-term outcomes. For instance, at the announcement of Russia’s invasion into Ukraine, the equity markets sold off. What many investors didn’t account for is the sell-off that had already been occurring in the market. Perhaps war only accelerated the sell-off that was already occurring to form a normal correction that happens in the markets on a regular basis.
Looking at the S&P 500 from January 2 of this year, the price fell from 4796 to 4326 on January 26, according to the charts on Yahoo Finance. That’s about a 10% correction.
Then on the eve of the Russian invasion into Ukraine on February 24, the S&P 500 dropped to 4225. That’s about a 3.5% drop from the low on January 26.
No doubt there were investors who were already nervous about their investments at the end of January, but started to feel some relief of tension in February as the markets recovered a little bit ahead of the Russia-Ukraine conflict.
When the conflict ensued, those fears resurfaced again for many investors. Selling at that moment, as many did, would have been ill-advised. Since that sell-off low on February 23, the S&P 500 has bounced back up as high as 4,400 on March 3. This attempt to time the market based on news, geopolitical events, and anticipation of the direction of macrotrends can be very costly.
Creating a plan that anticipates market movements like this is a much better solution. Certainly no one can plan for what, when, the magnitude and cause of the market correction, but history shows that they come regularly. Therefore, planning for — especially among those in retirement — a correction of as much as 10% every year and 20% every two to three years and 50% every eight to 12 years is sound financial planning.
Without having to time the direction of the market up and down, the investor can secure gains from the market in good times and hold on to their investments in the corrective times. The key to doing this well is having a financial plan that is built around what you want, your comfort with volatility and having an income or cash flow that allows you to maintain your lifestyle.
There are the media messages, then there are the messages you choose to listen to as it relates to your money. There is the larger economy, then there is your economy. There are broad financial markets, then there is your financial market. When you focus on the messages that bring you calm, the economics of your life that you can control and the financial investment market decisions you can dictate, you can much more confidently invest throughout market cycles and the influence of geopolitical events.
Barry H. Spencer is the co-creator and CEO of Wealth With No Regrets, a retirement financial planning process for financially successful professionals. He is the author of “The Secret of Wealth With No Regrets” and a contributor to three other books. Spencer is a financial educator, industry thought leader and philanthropic and retirement income planning specialist. He has appeared in publications such as Forbes, Kiplinger, and Worth, and TV affiliates of ABC, CBS and NBC.