First and foremost, Russia’s invasion of Ukraine is a human tragedy. This military action has already been described as the darkest day in Europe since World War Two.
As investment professionals, it’s our responsibility to assess the potential impact on financial markets and the global economy. While we monitor the developments, the only thing that can be said with certainty is that no one knows what Putin will do, or the effect it will or won’t have on the market.
Instead of crystal ball gazing, I would like to share some wisdom from the history of markets to help you stay the course over the coming days, weeks and months.
In summary; equities tend to shrug off geopolitical conflicts.
The following chart (also attached) visually illustrates the past ten decades of ‘bull’ and ‘bear’ markets (in fighting, a bull will thrust its horns up into the air, while a bear will swipe its paws down. These actions are related metaphorically to the movement of a market, so a rising market is called a ‘bull’ market, whilst a declining one is called a ‘bear’ market), a time depressingly filled with wars, financial crises, terrorist attacks, and a global health pandemic, all of which caused significant market disruptions that led to economic bear markets. It is impossible to predict the next bear market or its severity with precision. Still, one can be confident that after every bear market, there will be a bull market where the capital markets around the world will resume their permanent advance.
With the above said, it is no wonder why investors go into panic every time they hear fear-filled words like “market-crash”, “sell-off”, and “stocks tumbling”. I, too, would be much more comfortable if the media would instead start using words like a “temporary market decline” or a “marginal decrease in asset prices”. However, irrespective of the fear and negative sentiment prevailing in the public markets, this is not a good time to change your investment strategy.
Fleeing the market in times of a downturn could result in you missing out on some significant gains when the markets recover. This can have a considerable impact on your long-term performance.
An analysis by JP Morgan concluded that if you were not invested in the market for just 10 of the 7,301 days between 4 January 1999 and 31 December 2018, your annualised return went from 5.62% per year to 2.01% per year. To sketch an even more frightening scenario, if you missed the best 60 days of market performance, you would have realised a negative return of 7.4% on your investment.
What is even more eye-opening to JP Morgan’s study is that six of the best performing days in the market occurred within two weeks of the worst days. Therefore, we strongly emphasise not to try and time the market.
Given the above evidence, our advice would always be to have confidence in our investment philosophy. Trust the markets, resist a sell-off, diversify your risks and focus on the long-term. Or in more simple terms… DO NOTHING!