27/06/22War on Ukraine

The world is watching with concern as the War in Ukraine continues, the cost of living is rising and increases in interest rates and inflation are set to continue. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how investment markets respond. And, as we have seen so many times before, the media is managing to whip everyone up into a frenzy because that is what sells papers.

At ISJ Financial Planning, I believe in the fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We see this happening when markets decline sharply, as they have recently, as well as when they rise. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.

We’ve got your back

I know this is a scary time for you and it is natural to feel fearful, but I really do have your back. I also know it is easy for me to say don’t react and don’t do anything and that your emotions can be overwhelming. I get it. You are invested in a globally diversified portfolio that that has been designed with events like this in mind. Over the long term we know that your portfolio will grow, and temporary market declines are part of the experience. I understand that it can be distressing to see the value of your portfolio fall temporarily, but I am here to remind you not to react and stay calm as that is what will ensure your long-term investment success. This is just a test and it will pass. Just like similar declines that have come and gone in the past.

We’ve seen this before

Every time we have seen a downturn, we are led to believe it’s worse than the previous one and that there will be no correction. This is simply not true. We can’t tell you when things will turn or by how much, but we know that those that don’t’ react at this time will be compensated with positive long-term returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009 and more recently the impact of the Global Coronavirus pandemic.

Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

As your Financial Life Planner, I am here to ensure that your Financial Life Plan stays on track; that it delivers all of your life goals and supports you through your life’s transitions.

Amid the anxiety surrounding the coronavirus this must remain our focus. Decades of financial science and long-term investing principles still hold strong and they will see us through this storm. Just like they have through every other.

We saw a moment of optimism in the markets a couple of weeks ago, with some reports claiming that inflation had reached its peak. However, this optimism soon vanished last week as the US Consumer Price Index reached a 40-year high of 8.6%. The response by the Federal Reserve was to raise interest rates by 75 basis points – the most significant rate hike since 1994 – and raised renewed concerns of rising prices and stagnant economic growth, better known as a period of stagflation.

This negative sentiment by the Federal Reserve was shared by other central banks, including the Bank of England and the European Central Bank, both of which indicated a continuing hawkish monetary policy for the foreseeable future.

This global monetary tightening has sparked a global asset sell-off over the last year across most asset classes. Global bonds (GBP hedged), which are meant to serve as a shock absorber during turbulent times, have not been unpunished with a year-to-date performance of -11.81%, according to the Bloomberg Global Aggregate Bond Index. The Russel 3000 index, an equity index which seeks to be a benchmark of the entire U.S stock market, has a year-to-date performance of -25%, as seen below.[1]

Russell 3000 Index (Year to date Performance)

Source: Google Finance (2022)

Even the “mighty” Bitcoin, of which many people made baseless claims of being the new safe-haven asset, has seen a total collapse of -52% since the start of this year.

[1] Year to date, as of 16/06/2022

In times like this we need to broaden our focus and zoom out.

The chart below visually illustrates the inferred growth of wealth over the last 50 years. A time filled with wars, significant recessions, terrorist attacks and a global health pandemic, all of which caused substantial market disruptions. It is impossible to predict the extent of the current market downturn or its turning point with precision. However, if you expand your point of reference and take a longer-term view, history suggests there will likely be another bull market, much stronger than the current downturn, which will steer the capital markets towards their permanent advance, reaching new heights again and again.

we've got your back

Source: Timeline (2022)

It is also vital to avoid fleeing the market in times of market downturn, which could result in missing significant gains when markets recover. Recent research by Dimensional Fund Advisors serves to highlights the importance of remaining invested. The research found that the average five-year returns after a 10% and 20% market downturn have been approximately 70% on average over the last ten decades.

Source: Dimensional (2022)

It important in times like these we keep our heads up, remain focused on the Financial Plan and not let any short-term turbulence impact the longer term strategy.

 

If you’d like to discuss this in more detail then please do drop me a message or book a FREE discovery call with me HERE.

 

 

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