By Chief Investment Officer Tom Kelly, CFA.
With conflict between Russia and Ukraine escalating in recent days - unfortunately leading to an invasion and war between the nations - we are reminded of the never-ending risks in the world.[1] Just as the light at the end of the tunnel of the pandemic begins to appear, the next global challenge presents itself. The only thing predictable is the unpredictability of the world.
From an investment perspective, global ramifications of war are certainly hard to determine. Military events - just like economic disruptions, natural disasters, and social turmoil - affect the stock market in many unpredictable ways. The tendency for investors is to try to predict and adjust based on events, but we believe markets are continually pricing in expectations and likelihoods of further developments, whether positive or negative.
One of the hardest things to do as an investor is to stay invested and committed to your investment plan, particularly during periods of great uncertainty. However as this graph demonstrates, markets have rewarded investors over long periods of time.[2] In our experience, the discipline to stick to their investment plan through the periods of greatest uncertainty often differentiates great investors from the rest.
Source: Morningstar Direct, S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. See Important Disclosure Information.[2]
Unfortunately, there have been many major armed conflicts over the last century to look to and see how markets might behave. As this table demonstrates, both US stock and bond markets still achieved positive returns during the years associated with major wars of the past.
Sources: “What Happens to the Market if America Goes to War?“ Mark Armbruster, cfainstitute.org. Dimensional Returns Web. The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index. Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Volatility is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results. See Important Disclosure Information.
For investors historically, wars have not been detrimental to long-term investment performance. We do not believe the current situation will be detrimental to long-term investors going forward. While no two conflicts are the same - and each more unfortunate than the last regarding the continued loss of human life and havoc on nations - humanity (and the markets) remain resilient. Industry and innovation continue. We hope and pray this time is the same.
For those who have a sound, diversified, personalized investment plan in place, we do not believe that now is the time to make any major changes. Instead of focusing on how external forces that you do not control may impact your investments, we recommend that you focus on what you can control. For our clients, we are doing the following on your behalf:
Investing, Not Speculating
As anyone who invested through the COVID-19 pandemic knows, investment markets can be highly volatile, and regularly move in ways that we don’t expect.[3] Instead of making it up as we go along, we think that creating an investment plan ahead of time and sticking to it during down markets is most likely to benefit most investors over the long-term. We believe in long-term investing, not short-term speculating.
Rebalancing
During most volatile market periods, stocks tend to be more negatively impacted in the short-term compared to bonds. Therefore, you can potentially rebalance back to your target allocations by selling some bonds and buying some stocks. This can allow you to buy stocks when they are at lower valuations as well as rebalance your total portfolio to its target risk allocation, which may potentially help improve your risk-adjusted expected returns over the long-term.[4]
Tax Loss Harvesting
Volatile investment periods tend to provide more tax-loss harvesting opportunities within taxable accounts. You can potentially sell an investment now at a capital loss and buy a similar (though not a “substantially identical” investment per the Wash Sale Rule) investment.[5] Then in the future, you can realize capital gains in your taxable accounts and use the past capital losses to lower your tax burden, which can potentially increase long-term after-tax expected returns.
We don’t know what will happen, but we will control what we can in efforts to help your investment portfolio. As always, if you have specific questions or concerns related to your portfolio, please call us. We’re always here to listen and assist.
Important Disclosure Information & Sources:
[1] “Russia Invades Ukraine, Aims to Oust Leadership“. By Yaroslav Trofimov, Alan Cullison, Brett Forrest, & Ann M. Simmons, 24-Feb-2022, wsj.com.
[2] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
[3] “Started From the Bottom”. Nick Maggiulli, 23-Mar-2021, ofdollarsanddata.com.
[4] “Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” Gobind Daryanani, fpanet.org.
[5] “Wash-Sale Rule“. Jason Fernando, 17-Feb-2022, investopedia.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
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