Like many of you, this week I watched in horror and shock as Russia invaded Ukraine. Years of rhetoric and posturing had made many of us numb to Putin’s antics, and an actual invasion seemed a distant possibility just a few weeks ago.
My heart goes out to the Ukrainian and Russian people, who are now dragged into a war that can have no happy outcome. In light of that, it may seem crass to discuss market impacts from the comfort of my office, but our role is to help navigate troubling events in the context of a financial plan.
Even before the Russian invasion further destabilized the world, the market was on a bit of a slide. Rising inflation and interest rates were eroding investor confidence and casting a pall over the growth of the past year. Given the recent escalation in Ukraine, for many it may seem obvious that the market will drop further in the coming weeks. The temptation is to sell your riskier holdings and wait for a good time to get back in. That sounds rational but, if history and experience is any guide, it’s rarely a successful strategy. Wise investors know that there are always risks to the market, every single day. What risks ultimately manifest is both unknowable AND a major driver of future market movements.
In simple terms, we cannot predict the future with any real consistency, and often, even what seems obvious does not come to fruition.
If we sell, we get the temporary comfort of no longer experiencing market volatility, but the risk to our long-term success dramatically increases and the stress of timing our re-entry escalates. Missing out on just a few large gains can have a substantial impact on your returns, and large gains tend to cluster around periods of volatility. To my knowledge, there are no rigorous academic studies or research papers that support market timing as a viable strategy for increasing wealth. None. There is, however, plenty of research that concludes market timing is fraught with unnecessary risks and lower-expected returns.
Maintaining your allocations, rebalancing, capturing tax losses, and potentially converting assets from tax-deferred to tax-free accounts are the things we can control, so those are the things we (as financial advisors at FP Inc) act upon for each of our clients.
For most of you, especially those who have worked with us for many years, this advice is expected (even if it still may be hard to stomach). To others, it may sound like a cop-out, an evasion, or just flat out stupid. We understand how it can look and feel, as we experience it personally with our own investments. However, I firmly believe, and have had that belief reinforced many times over, that holding your course and maintaining your allocations provides the best chance of successfully reaching your goals.
As always, we are here to support you in your individual journey so never hesitate to reach out to your advisor with any questions or concerns.
For now, let us all remain grateful to live in a country that is not constantly at risk of being invaded, subjugated, or subjected to the horrors of war.