Hi everybody, Evan Neufeld here. Today seems like one of those days that most of us are going to remember for a long time. I'm speaking specifically about the Russian invasion of Ukraine. I've had a number of clients reach out to me and ask for my thoughts and I've shared a few different things here. So I just wanted to put together a few specific thoughts as it relates to this and how you can be an effective investor and how you should be reacting when it comes to your money when you hear about world events, like civil unrest and the prospect of significant wars. So here are some of my thoughts on this topic.
It goes without saying that many of you are thinking about the Russian invasion of Ukraine and what that means for you. Unfortunately, this isn't the first time that civil unrest has been top of mind recently. Is this something that will blow over quickly? Is this the start of World War three? I don't know.
It's my belief that we've always lived in “uncertain times” and this is just another example of that. But even though the world feels like it is constantly on the brink of another crisis, this too shall pass. People say that you should never fall for the trap of believing that this time it's different. But the reality of life is that every situation is different. except for how people will behave under certain conditions. They act on fear and then react again on new information. Shoot first, aim later.
Looking at how the stock market has historically reacted to wars. You'd probably be surprised at how the market has behaved in advance of an attack and then in the subsequent aftermath. Data compiled by national bank shows that on average, going back to 1939, which includes the Nazi Germany invasion of Poland, leading up to a significant military event, the US stock market has been negative almost 70% of the time in the months leading up to it. However, in the three months and 12 months after all of these events, 73% of the time, the market has been positive as a result.
This is kind of opposite of what you'd expect, because leading up to bad news seems like, well, bad news isn't here yet. Then things must still be okay. But then when the bad news comes, then the market kind of turns around. It's a little bit backwards. Historically, the lead-up or the anticipation of armed conflict has been worse for stocks than the aftermath. The market hates the unknown. It can handle good news. It can handle bad news, but it hates trying to figure out what it will be.
My wife and I enjoy watching jeopardy. I specifically like watching jeopardy, but I think she's actually grown to enjoy it herself. We've been watching more frequently now in these colder months and I've noticed a trend amongst players who win most often. Everyone who plays jeopardy is brilliant of course, but the people who consistently win are those who answer the fewest questions wrong. Duh! I know, I know, hear me out, making mistakes in jeopardy, reduces your cash balance. It's a penalty, but it also gives your opponent the opportunity to answer and get further ahead. It's a double-edged sword of falling down and getting run over.
Guessing and simply trying to be quick on the buzzer can sometimes work, but the best players are methodical and ringing only when they know the right answers. The same is true with investing. Assuming you're smarter than others and being quick to act are rarely rewarded with long-term success. Following a plan, focusing on what you can control will lead to better outcomes in a more reliable way.
Here's another analogy I'm borrowing from other Charles D. Ellis:
In expert tennis, the ultimate outcome is determined by the actions of the winner. Professional tennis players stroke the ball hard with laser-like precision through long and often exciting rallies until one player is able to drive the ball just out of reach of or force the other player to make an error. These splendid players seldom make mistakes. Amateur tennis is almost entirely different. The outcome is determined by the loser. Brilliant shots, long and exciting rallies are seemingly miraculous recoveries are few and far between. The ball is too often hit into the net or out of bounds and double faults at service are not uncommon.
Instead of trying to add power to a serve or hit closer to the line to win, we should concentrate on consistently getting the ball back. Amateurs seldom beat their opponents, but instead beat themselves. The Victor in this game of tennis gets a higher score because the opponent is losing even more points.
With my clients, I've often said to them, that part of our goal when it comes to investing is win by not losing. Many things in life are much closer to the amateur tennis player analogy, where the fewer mistakes you make, the greater your chances of success.
Here's some typical mistakes investors make during corrections and crashes. Confusing their time horizon with someone else's, trying to time the market or news cycle or the whims of a dictator, failing to stick to their plan, not having a plan in the first place, watching the news more than usual and watching the stock market more than usual. Finally, sitting in cash until the “dust settles”. Avoiding these mistakes largely falls under the strategy of do less or do nothing, it's counterintuitive, uninteresting and highly effective. Remember that your portfolio is like a bar of soap. The more you touch it, the less of it you have.
I don't believe that ignorance is a good solution to scary world events. Being informed is valuable, but with context. Let's think critically about the realistic, fundamental impact of these current events. Big picture trends and consumer preferences are the things that drive economies, company profits, and stock prices.
As a result will a war with Ukraine impact the number of businesses utilizing cloud computing software? Will Disney have a decrease in theme park attendance? Will e-commerce trends revert back to brick and mortar? Will North America's aging population suddenly have different needs over the next decade? Don't get me wrong, there will likely be an economic impact as a result of war. But outside of Russian stocks and increases in commodity prices, the harsh reality is that the influence of this situation on the long-term global economy is likely to be low.
Yes, of course there are a million what ifs that we could consider, but that's nothing new. I don't want to deflect from the main topic at hand here, but the needless loss of life as it relates to this war is the real tragedy coming out of all of this. I hope and pray for a speedy end to this nightmare for the Ukrainian people and a return to safety, independence, and democracy soon.
Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors. Before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.