If investors have learned nothing else over the last two years, it seems likely that most have figured out that unexpected events—whether a worldwide pandemic or the invasion of one sovereign nation by another—can have a dramatic effect on the financial markets. COVID shutdowns, Russian tanks in Ukraine, federal bailouts, interest rates, inflation … the list of unexpected and often unwelcome “visitors” on the world financial and economic stage seems to get longer each year.
Amid all the uncertainty, what’s an investor to do? Naturally, the human cost of the too-frequent “unexpected”—in lives lost, damage to the economy, and disruption to the world order—is hard to comprehend and even harder to contemplate. And for American investors, it is never enjoyable when the financial markets, both at home and abroad, react to these disturbing events with wide swings in volatility. Meanwhile, coverage of such disasters in our 24-hour-a-day news cycle tends to drown out other information that has more positive implications, such as the fact that earnings for companies in the S&P 500, in aggregate, rose 22% in the final quarter of 2021, or that overall economic growth in the US continues to be robust, as evidenced by the recent strong jobs report.
Whenever there is war or any other type of disastrous occurrence anywhere on the planet, it is natural to feel uncertainty at the least, fear at the worst. For investors, it is natural to think, almost immediately, “How will this affect my investments? Should I be doing something different? Is it time to get defensive?”
The fact is, though, that uncertainty is, quite literally, the only true certainty. Not at any moment in time can any of us see what lies ahead, and we especially cannot see how the markets will respond to any particular event. There is an interesting phrase on Wall Street, that “the smart money” is betting on this or that outcome. But the truth is that the smartest investors—those who have enjoyed the best long-term outcomes—don’t bet at all. They understand, for example, that nothing that happens in Ukraine—as regrettable and tragic as those events may turn out to be—will change the underlying value and long-term potential of the world’s most well-run companies.
As an example, consider this chart, which illustrates the one-, three-, and five-year market responses to some of the most traumatic financial, economic, and military/political events of the last several decades.
SOURCE: Dimensional Fund Advisors. Past performance is no guarantee of future results.
Note the market returns achieved following the 9/11 terrorist attack, which was, in some ways, the most traumatizing geopolitical event in US history and one that resulted in the week-long closing of the New York Stock Exchange. One year later, a portfolio invested 60% in equities and 40% in fixed income would have lost 1%. After three years, however, the portfolio would have grown by 40%, and that rate would have slightly more than doubled—to 81%—after five years.
So, whatever form “the next crisis” takes, we should all certainly remain informed and attentive. We should hope and expect that our world leaders will be able to find a path through, as they have so many other times before. What we can’t and shouldn’t try to do is predict how the markets will behave in the next few weeks or months. And we should take comfort in the fact that nobody else can, either.
At JFS Wealth Advisors, our aim is to support disciplined investors who focus on what they can control: building well-diversified portfolios that align with their most important goals. We believe that over time, the financial markets will exhibit the resilience they have demonstrated for decades. In other words, in “the next crisis,” patient, disciplined investors can expect to be rewarded by favorable long-term results.
To learn more about how you can get involved in providing aid to Ukraine, click here to read our article, “Charitable Options to Support the People of Ukraine.” And if we can provide more information or guidance, please click here to contact us.