Before we start talking about the markets, I want to first take a moment to pause and recognize the true cost at the heart of events like those we’ve been watching unfold in Eastern Europe over the past week — the human cost. From this distance, it can be easy to get caught up in the financial waves rippling outward from the latest geopolitical crisis, what conflict elsewhere means for us, especially when the markets have already been volatile lately.

But dozens of Ukrainians have already been killed, with hundreds more wounded, in the first 24 hours alone — and these numbers will only continue to climb as the crisis persists. It’s natural to feel nervous, to wonder what will happen to the markets, and to what extent it will impact our own lives. But perspective is important — and our financial anxieties must come second.

That can be a good thing. When it comes to investing, certainty is hard to come by no matter what, and while we consider the devastating effects this crisis will have on Ukraine, we can take comfort in the clues we’ve already seen as to which way the financial winds may be blowing.

Here’s a breakdown of what’s happened so far, and what that could mean for you and your investments.

What’s happening in the markets 

The night of Wednesday, February 23, Russia followed through on recent threats and invaded Ukraine, attacking multiple cities throughout the country. That impacted financial markets, as most geopolitical crises tend to do: Stock markets started the day in the red, then roller-coastered back and forth all day before rebounding. “Crushing” sanctions issued by the US Thursday are likely to further disrupt things, as will any sanctions issued by NATO in the coming days, particularly energy prices (Russia is one of the world’s biggest oil exporters) and the banking sector (sanctions will impact their business with Russian banks). As you might expect, oil prices spiked significantly during the day Thursday, too, though it’s worth noting that those prices were already on the rise before this crisis, thanks to the strong economic recovery we’ve seen in the wake of the 2020 recession.

In fact, not all of the market volatility we’re seeing in the news right now is an effect of the Russian invasion. The stock market was down about 10% this year before tensions started heating up in Eastern Europe. December’s 7% inflation rate was the highest we’ve seen in 40 years, and people were already worried that, if it attempts to slow things down, the Fed might go overboard and trigger a recession instead.

Whatever ends up happening with Russia and Ukraine — whether war is on the horizon or not — expectations for the US economy’s growth this year were nevertheless positive before this. The forecast was that it would grow 3–4% in 2022, and as S&P 500 companies report their Q4 earnings, the results have been exceeding expectations thus far. (Employment numbers are good, too, although not so much for women specifically.) So we’re starting from a strong position no matter what happens.

So what’s an investor to do? Spoiler alert: The answer, in most cases, is “nothing.” And here’s why.

Diversification matters

At Ellevest, you’re not just investing in stocks, or in any single asset class. Our experience tells us that the best way to protect against the unknown is a well-diversified investment portfolio, with a range of investments; in fact, you won’t find any portfolios on Ellevest.com with a 100% allocation to stocks. The investment portfolios we offer at Ellevest are diversified across stocks, bonds, and alternatives, depending on your goal.

For shorter-term goals, there’s a lower allocation to stocks to reduce the risk of a market downturn derailing you close to your goal date. For longer-term goals, there’s a higher allocation to stocks, because that may give you the time to make up for market downturns, and to give you the opportunity to earn the higher returns that stocks have historically posted. Through all of this, market declines are normal and a necessary (however unfortunate) part of investing.

Putting this market volatility in context

Over the past 93 years, the stock market has gone up by an average of nearly 10% a year — but it didn’t go straight up! It’s normal for the market to fluctuate up and down, even by this much (and more, believe it or not). And while periods of volatility sparked by global events do tend to shake things up in the short term, the markets are ultimately guided by capitalism — in other words, they’ve historically trended toward growth in the long run, even accounting for international crises.

When things are bumpy, it can be tempting to do something. But historically, that hasn’t been your best bet. Here’s an example: If you had invested in the stock market from 1999 to 2018, and not touched it, your money would have tripled. But if you had traded in and out and had missed out on just the ten best stock market days over that period — just ten days — your returns would have only been half of that. People may think they should wait for a pullback to invest, but the data shows that historically, “time in the market beats timing the market.”

Even when volatility lasts for days, weeks, or months, it may feel scary, but switch over to a long-term view and watch it pretty much disappear. We believe the way to weather periods of volatility is by building a resilient portfolio that’s diversified across different asset classes — which, as mentioned above, is what we do at Ellevest. Certain assets tend to weather volatility better than others; those include assets with low correlation with the stock market, like municipal bonds and alternatives, and assets that generate cash flow, like dividend-paying stocks and bonds. That’s why these asset classes can be found in almost all of our recommended portfolios.

It’s also important to remember that all returns come with risks. And while investing in the stock market may come with the greatest risks, historically, it has also had the best returns over long periods.

The bottom line about market drops

Markets fluctuate over time, but one of the biggest mistakes investors make is trying to “time” the market by guessing when to buy or sell. Another big mistake they make is to “do something” (ie, sell) when markets decline, even over longer periods of time. 

Instead, we recommend investing regularly — a bit out of each paycheck — into a low-cost, diversified investment portfolio. This can mean you’re buying in some markets that are higher and some that are lower, but they may even out over time. 

In short, we believe the most prudent course of action is to have a well-thought-out asset allocation and keep investing steadily — aka keep calm and invest on.

Disclosures