When Russia invaded Ukraine in early 2022, the event set off financial ripples worldwide. Gas prices in the United States shot up 42% shortly after the first Russian units crossed into Ukraine. Wheat futures soared by nearly 60%. The reasons for these increases are apparent: Russia supplies a hefty chunk of the world’s oil, and both Russia and Ukraine account for a large percentage of the world’s wheat supply.
Naturally, businesses and investors alike became nervous and adjusted their behavior in reaction to the war. While gas prices and wheat outlooks would come down after the initial fear-based increases, the incident was an excellent illustration of how global events can cause monetary impacts around the world.
Those impacts, in turn, affect markets. In the days immediately following the invasion, the S&P 500, already shaken by worries of future interest rate hikes by the Federal Reserve, plunged even further, down 8% since the beginning of that year.
That sell-off happened, as such things often do, because of fear. Investors were afraid the value of their assets would drop, so they panic-sold which not only divested them of assets that would later rise in value but also helped fuel the momentary drop in the first place!
The Instinctive Attraction of Negativity
As humans, we instinctively fixate on things we perceive as dangerous or in other ways negative. We slow down to rubberneck at the traffic accident, not the people driving collision-free! The news industry has figured this out and feeds us a steady diet of worrying stories because we’re more likely to watch when they do.
The trouble is that when we consume those regular helpings of bad news, we start to respond to it. Sometimes that’s warranted; when the meteorologist tells you a tornado is bearing down on your house, that’s bad news and you’d be very wise to react accordingly. However, when the news tells you of a terrible event that’s happening halfway around the world, immediately trying to react to it can be counterproductive. You may act when you’d be wiser not to.
Those Wall Street panic sellers who dumped their investments at the beginning of the Russian invasion and didn’t quickly re-buy those assets learned that the hard way; the assets they’d sold eventually went up in value while they sat on the sidelines, having cut themselves off from participating in the gains.
Trying to time assets in the market, or the market as a whole, carries significant risk. A study by J.P. Morgan discovered that if you miss just the 10best-performing days in 20 years, you can cut your investment in half. Missing the best 20 days can cause you to lose money. As such, it’s generally considered a wise practice not to be too hasty reacting to what you hear on the news.
It’s important to understand that we are currently in the midst of a polarizing political environment. Two different cable news channels frequently tell the same story in radically different ways. The end result is that two smart people can have very different interpretations of reality. If one of those people thinks the economy is on the right track, while the other thinks it’s about to crash and burn, each person is likely to make very different financial decisions.
In fact, both of them should pause and ask themselves the same question: “What if I’m wrong?” At Asset Preservation Wealth & Tax, we believe diversification isn’t just for investments but also for perspectives. A high-risk strategy is one in which only one entity’s perspective is considered when making investment decisions.
Instead, we solicit multiple perspectives who hold many different viewpoints. One of the investment companies we work with is known as the most liberal money manager in the world. Another is known to be highly conservative. We seek those widely divergent viewpoints specifically because they’re different. By investing from multiple perspectives, we hedge against the eventuality that one of those perspectives might make a bad call. One of the biggest risks we could take with our clients’ money is to follow only one perspective.
We were starkly reminded of this during the 2020 presidential election. Before the polls opened in November, markets were down. Some feared then-Democratic candidate Joe Biden would raise taxes and impose severe regulations which would hurt the markets. Others felt if President Trump won reelection, riots would erupt, also harming the markets. One of our conservative managers shifted money defensively, believing the former group’s predictions were right. BlackRock did the opposite.
In that instance, BlackRock won; the markets rose almost 6% that month. Had we only sought the perspective of the conservative money managers, our clients would have lost money. Instead, they did well because we considered multiple viewpoints.
Understand Your Advisor’s Approach
Have a conversation with your financial advisor. Ask them how they’re picking their funds and who makes the decisions. If the answer is “only I do,” that’s when it’s time to find a different advisor — one who understands that a single person can’t get it right all the time.
That approach can help keep you from making rash decisions in reaction to global or national news events and encourage you to instead make carefully-considered, rational money moves.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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