The Russian invasion of Ukraine has taken the world by surprise, and financial markets don’t like surprises. While the gut-wrenching humanitarian crisis is difficult to process, our job as money managers at all times is to analyze the situation – any situation - and determine how it is likely to affect our clients and their portfolios. We analyze the atrocities in Ukraine using the same discipline that we use in years of easy money and a growing economy, like 2021. The circumstances may be new, but the process remains the same:
- Identify the risks and opportunities.
- Pinpoint areas of higher-than-normal risk or higher than normal opportunity.
- Determine if a new investment strategy can decrease risk or benefit from the opportunity.
- Design the investment strategy – get it “on deck” to implement.
- Implement the strategy.
- Begin again.
In times of heightened uncertainty, we run this cycle many times, accounting for many “what if” scenarios. The daily fluidity regarding the possible outcomes of the war requires us to have more strategies “on deck” to implement if needed. For now, we believe that the countries that will be hit the hardest are the ones that depend on Ukraine or Russia for imports, such as oil, wheat, and other grains. We viewed this as a higher-than-normal risk and reduced our allocation to international holdings early in the conflict. We are considering other possible trades, depending on how events unfold in the coming weeks and months.
It is important to remember that world events don’t happen in a vacuum. While the Russian and Ukrainian economies are not big players in the world economy, the loss of their output will push and pull on other economies around the world. The countries that can fill in the gaps for Ukrainian and Russian commodities may benefit from the crisis, while countries that cannot replace those commodities inexpensively will suffer.
History tells us that the stock market has rewarded investors more over time than any other asset class, including all of the world’s most challenging and uncertain events. It can be hard to maintain that perspective in times like this when the here and now seems so dire. And it is exactly why money managers require the discipline to follow a consistent process, no matter what the environment is.
While it is easier to manage money in a year like 2021 when so many boats are rising, the challenging years like 2022 are what our clients truly hire us for – so we can use our process, experience, and resources to navigate an unprecedented and evolving environment.
We plan for an early release of our quarterly market report, Risks and Opportunities, in which we will take a deep dive on international challenges, as well as the effect that rising interest rates and inflation rates may have on financial markets.
If you have any particular questions you would like us to address, or if you have questions about your portfolio, please email us at firstname.lastname@example.org. We’re here for you.
Debra Brennan Tagg is a CERTIFIED FINANCIAL PLANNER™ Professional and the creator of the DBT360 Financial Plan, a proprietary program that helps her clients prioritize their goals, leverage their resources, and address their risks. She is the president of BFS Advisory Group and teaches the public and the financial services industry about the importance of values-based financial planning and investor education.