Investing during wartime
- Russia invades Ukraine;
- Financial markets react negatively;
- In the weeks before the invasion, there was already increasing nervousness among investors;
- A war is no reason to make adjustments to the investment portfolio;
- A good time to start investing.
The conflict between Ukraine and Russia has escalated further as Russian troops invaded Ukraine under the guise of a peacekeeping mission. Ukraine has declared martial law.
Financial markets react negatively to the news with falling prices as the result. The response is a good indication of how finance works. Beforehand, 'the market' weighs up the chance of a good outcome and a bad outcome. Now that the chance of a possible escalation has turned into an actual invasion, prices react very quickly.
We realise that in this period of alarming headlines and troubling market declines, you may have questions about what actions to take given the uncertainty ahead. Every crisis is different in its details, and a crisis like this one is no exception.
This calendar year, EBI's stock benchmark (the MSCI All Country World Index) is down nearly 11%. Despite the fact that our model portfolio has fallen less sharply, we can imagine that investors are concerned.
However, such declines are quite common. It is important that investors realise this and prepare for it, if they have not already done so. To further illustrate this, the graph on the left shows the strongest annual declines in the European stock market since 1980. On average, share prices fall by more than 20% once every 7 years and share prices fall by more than 10% once every two years.
The central question is how financial markets develop after a sharp decline? You can see that in the graph below. Data since 1926 show that future returns are on average higher with a more severe decline. That also makes sense. As soon as the financial uncertainty is high, investors demand a higher return. That is why we advise investors to buy or buy more shares. Even though we have no idea whether prices may not fall further.
It may sound crazy, but stock markets actually seem to recover once political tensions actually turn into war. We will illustrate this with a number of examples.
1991: Operation 'Dessert Storm'
In the two weeks leading up to the start of Iraq's expulsion from Kuwait, the S&P 500 fell nearly 5 percent and the price of oil rose 12.5 percent.
Two days after the ultimatum expired, the Americans launched an airstrike on January 17, 1991, dubbed Operation Dessert Storm. On that day, the oil price fell by no less than 33 percent in one day and the S&P 500 rose by 3.7 percent.
2003: Iraq War
In the three months before the actual attack on Iraq on March 19, 2003, in response to Saddam Hussein's possible development of nuclear weapons, oil had become 40 percent more expensive. The S&P 500 bounced 11 percent.
When President Bush gave the final ultimatum to Hussein, the price of oil began to fall and stocks to rise. In a week, oil dropped by nearly a quarter and the S&P 500 rose 8 percent.
In the month before the US intervention in the civil war in Libya, stock prices fell about 5 percent and oil became 12 percent more expensive.
Once the military actions started, the stock market jumped 1.5 percent right away and even gained 4 percent the following month.
In this case, the oil price continued to rise, even a month after the start of the intervention. Four months later, Gaddafi had been defeated, the oil price was already a quarter lower.
What should investors do now?
The answer is simple: "Nothing at all". Since 1900, financial markets have shown to reward investors with returns in the long term.
It may be a good time for investors to rebalance the portfolio if the equity weight has fallen sharply. For those considering investing, know that troubled financial markets often provide good buying opportunities. Getting out almost always ends badly. Especially because the best days on the stock market occur at times when it is very restless.
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