Some insight into how investors can navigate these tumultuous times.
Thursday, 10 March 2022
Over the past few years, the world has collectively struggled with various crises all demanding our attention. From a global pandemic to rising concerns over climate change to a war in Ukraine that's leaving us all holding our breath - it's hard not to be scared over current world events. As an investor, a world in crisis can become even scarier when we begin seeing changes in our economy and in a volatile market.
So, what are investors supposed to do in an environment where there is no place to hide from the triumvirate of COVID, Inflation, and War? Tune in to this week's episode of Flourish Insights to find out.
Hi everyone, Jay Pluimer here with Flourish Insights. As the director of investments at Flourish Wealth Management, I take pride in providing our clients, colleagues, and friends with resources and information that can help them make strategic and effective choices regarding their investments. Did you know we have an Alexa Skill? To listen on your Alexa device, just say, “Alexa, play Flourish Insights.”
Today, we’re discussing a World in Crisis
The curse that “may you live in interesting times” has been extremely relevant for the past couple of years. We are approaching the 2-year anniversary of our work from home world due to the ongoing COVID pandemic while confronting a brutal war in Ukraine along with an inflationary environment that is hurting the financial situation for millions of Americans on a daily basis. It would be difficult to handle even two out of those three crises at the same time, and close to impossible when confronting all at the same time.
The global balance for peace and economic stability was broken when Russian President Putin invaded Ukraine over two weeks ago. This had been a developing situation since the beginning of the year as Russia amassed military forces and promised to be the savior of Ukrainian citizens. The lies told by Russia to justify the war in Ukraine have been disclosed to the world and, unfortunately, we are all bearing witness to the enormous cost in lives and property on a daily basis. Although I have been fortified with videos of Ukrainian farmers stealing Russian tanks with their tractors and the bravery of President Zelenzky, the horror of this war is inescapable.
In addition to the emotional and psychological cost of witnessing the destruction in Ukraine, we are all being affected by dramatically higher gas and energy prices. We recently set a new record with the price of gas exceeding $4 per gallon, but there is a path to $6 per gallon gas prices. Inflation rates of 7% plus are here to stay for the next few months, even in an environment where the Federal Reserve will begin to raise interest rates in an attempt to bring down inflation. Higher prices at the pump aren’t the only cost we are experiencing in America as the stock market is firmly in correction territory with losses of over 10% in the S&P 500 Index and 12% plus for Small Caps. Bonds have also been losing money over the first few months of the year, leading to a situation where expenses are rising while the value of investment accounts are falling.
So, what are investors supposed to do in an environment where there is no place to hide from the triumvirate of COVID, Inflation, and War? The most important approach is to stay patient and avoid making significant portfolio changes, particularly in an environment where the future is becoming even more difficult to decipher. There are real concerns about the safety of nuclear facilities in Ukraine, world hunger without crops being planted, and consequences if NATO or the US get more involved in the war. There are a wide variety of perspectives about what will happen over the next few days, weeks, and months, although at this point we can all agree that the chances of Ukrainians accepting Russian rule without a fight are zero. It’s too early at this point to know when the conflict will end, or even what a resolution could look like, but we do know that Flourish will take a patient approach to helping client portfolios weather the storm while staying positioned for long-term success.
For context, we analyzed data from other geopolitical crises from the past 30 years to see how markets reacted. The market dipped during the first couple weeks of each crisis but was generally flat over the course of the crisis. Once the crisis was resolved, the markets bounced back by an average of 5% in the first 6 months and 9% after a year. Selling stocks and hiding in cash during the crisis would lock in the losses that we have experienced so far this year, which is not an attractive option. Plus getting out of the market now means getting back in at some point in the future and the decision to buy is usually more difficult to make, much less execute on a timely basis. Our approach has been to complete Tax Loss Harvesting and rebalancing trades to maintain fully diversified portfolios that will be positioned to capitalize on an eventual recovery. In the meantime, we recommend that our clients stay patient with world and market conditions. We also send our thoughts and prayers out to the people of Ukraine with hopes for a speedy and peaceful resolution to a brutal and unnecessary war.
For more up-to-date insights into the market, the economy, and what it all means for your portfolio, subscribe to Flourish Insights on Apple Podcasts, Spotify, or wherever you listen to podcasts. You can also find our full catalog of episodes at FlourishInsights.com. Thanks so much for listening, and don’t forget to stay focused and think long-term.