The terrible events in Ukraine, resulting from Russian military action, are above all else a human tragedy. Many innocent lives will be needlessly lost.
Against a backdrop of so much suffering already, discussing the investment and economic implications might appear unseemly.
However, we are privileged to be responsible for the financial wellbeing of many Australians, and so we believe it is appropriate for us to share our thinking with you.
Russia’s incursion of Ukraine signifies the most significant military intervention since the USA invasion of Iraq in 2001. While military action is scary and potentially harmful to investors, it is often short term. History gives us some indication of what this means to investment markets in the context of participation and time.
Whilst each sharemarket drop is different, the below chart from Vanguard shows 8 Geopolitical events and the subsequent rebound in investment markets in the 6 and 12 months following the event. The good news for investors that remain invested is that the historical average return over the 12 months following each event has been 9%.
Learning from the past
If we look at the investment market over the last 40 years, there have been 4 significant downturns (bear markets – defined as a decline of greater than 20%).
As the chart shows, the downturns are often short, sharp and painful. The chart also shows that remaining invested over the longer term has arguably been the best risk management tool investors have available. If we reverse the psychology, investors should embrace periods of volatility as an opportunity to buy shares at a discount.
During times of uncertainty, growth assets (such as shares) are likely to be more volatile than fixed-income assets such as bonds. The best way to smooth out intermittent periods of volatility and to achieve more consistent long-term returns is to spread your holdings over a range of assets in a well-diversified portfolio of investments that reflect your personal tolerance to investment risk.
Over 30 years we’ve developed a disciplined process of diversifying investments and steadying the ship in rough seas.
If you would like to learn how the Muirfield team can help, we have offices in Geelong and the Surf Coast and pride ourselves on being easy to reach on (03) 5224 2700.