As the situation in Eastern Europe hurtles towards a catastrophe, many investors are questioning how this will impact their portfolios.
Feb. 23, 2022
“The strongest of all warriors are these two — Time and Patience.” — Leo Tolstoy, ‘War and Peace’
There is no room for emotion in investing! This is one of the core tenets of building a successful portfolio.
And so, while I’m not qualified to comment on the geopolitical ramifications of the events unfolding in Ukraine — which are tough to look at unemotionally — I can shed some light on how investors should manage their portfolios.
This topic requires an extra minute or two of reading today, so bear with me.
Should investors be worried?
Here at MyWallSt, we always say that if an investment is keeping you up at night, it’s time to reconsider your appetite for risk. But with the current situation between Russia and Ukraine, the risk is harder to address as it impacts the entire market.
Turn on any news outlet, open any social media feed, or — if you’re in your grandmother’s house, presumably — turn on the radio, it’ll be all doom and gloom regarding Ukraine.
While international conflict is something that benefits nobody, it does not guarantee economic ruin either. For example:
- During the Korean War (1950 to 1953), U.S. stocks fell at first, then recovered as normality resumed, rising roughly 15%.
- During the Vietnam War (1965 to 1973), the stock market grew by 43% as industries in the U.S. recovered from the initial impact and began rebuilding.
- In both Iraqi wars (1990 and 2003), the market fell 10% initially but had recovered within a year.
Another point that’s spooking investors is the economic impact of war. The simple truth is that war can benefit certain industries — defense stocks — whilst negatively impacting others — growth and transport stocks. In an age of rapid technological change though, these impacts will affect different sectors in different ways, making the need for a diversified portfolio all the more important.
One sector that is almost certain to suffer from extreme volatility is energy, with oil and gas prices expected to soar. After all, Russia provides 10% of the world’s — and 50% of the EU’s — energy. This could spin out of control, admittedly, and send already soaring energy prices higher. This seems like an obvious point of avoidance for investors right now.
Should the worst happen, history has shown that the likelihood of a complete market crash is unlikely. As always, the surest way to shore up your portfolio against geopolitical events like this is to build a diversified portfolio full of quality stocks of different market-cap sizes, from dispersed regions, and operating in varied sectors. And, if you’re concerned about how such world events pan out, take a look at this chart from @morganhousel:
At the end of the day, diversification, coupled with a long-term buy-and-hold strategy, will help alleviate any drastic damage that world events can cause your portfolio.