My F&M

How Should Investors Respond to Putin's Invasion of Ukraine?

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After many weeks of consistent denials, Putin has invaded Ukraine.  The leadership of the West has arguably not had to confront this level of aggression by a major power since the late 1930s.  This is a big deal. 

Moreover, amid the highest levels of inflation in decades, hostilities in Europe only seem likely to intensify inflationary pressures through higher energy prices as Russia is a major supplier of both oil and natural gas.  While the Fed could respond to market turmoil with additional accommodation initially, higher inflation will force the Fed’s hand toward moving interest rates higher and perhaps even sooner than otherwise.  For markets, this aspect of the current crisis could prove the most significant and enduring.

So, how should investors respond?  You know the fundamental foundation and discipline inherent in our investment approach.  I won’t recount the details again here other than to note what it is not: it is not dependent upon headlines.  Wanting to react to such events is natural but it is seldom productive. 

Broad diversification doesn’t help portfolios’ relative performance during bull markets, but diversification generally mitigates market downturns be they corrections – as that which we have just entered - or worse.  And that same rebalancing discipline which had us trim stock positions in the great bull market from the Spring of 2020 through a few weeks ago now causes us to trim bonds and cash to add to stocks simply to rebalance stock holdings back to target allocations in portfolios.  Sell (a little) high, buy (a little) low.  It sounds easy.  In theory, it is easy.  But, days when fear and passions run like today, serve to illustrate how difficult that discipline can sometimes be.

The invasion of Ukraine is a very significant event, but it does not change anything about the way we approach markets in the long run.