Before we start talking about markets and portfolios, 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 we’re already weathering a substantial amount of volatility.

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. 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.

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. Predictably, this development has impacted financial markets: Stock markets started the day in the red, then fluctuated 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 and the banking sector. Oil prices spiked significantly during the day Thursday, too, thanks to Russia’s dominance as a major exporter: While they were already on the rise thanks to the economic recovery in the wake of the 2020 recession, the crisis tipped them over $100/barrel Wednesday night.

Bear in mind that not all of the market volatility we’re seeing in the news right now is an effect of the Russian invasion. As mentioned earlier, higher inflation and worries about the Fed’s imminent policy response had already been driving things downward. The stock market was down about 10% this year before tensions started heating up in Eastern Europe. The 7% inflation rate reported back in December drove anxieties that, if it attempts to slow things down with higher interest rates, the Fed might go overboard and trigger a recession instead.

But whether war is on the horizon or not, expectations for the US economy’s growth this year were 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 the economy is already starting from a strong position regardless of what comes down the political pipeline.

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 not straight up. Market declines are normal and a necessary (however unfortunate) part of investing. And while periods of volatility sparked by global events do tend to shake things up in the short term, the markets have historically trended toward growth in the long run, even accounting for international crises.

When things are bumpy, it can be tempting to time the market, or even just shift some of your assets out of the stock market. 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.” 

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.

Diversification matters

As stressful as it can be when the stock market drops, it’s key to remember that you’re not just investing in equities, 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.

The portfolios we help you build at Ellevest are diversified across equities, fixed income, and alternatives, depending on your needs and goals. We also seek and recommend alternative investments that are designed to move differently from publicly traded stocks and bonds. While these investments carry different kinds of risk, they help mitigate the impact of market risk — which is important when the markets get volatile.

The bottom line about market drops

We know that the equity markets will rise and fall (but historically, have risen over the long term). It’s tempting to pull out when markets decline, but it’s not always the right decision to make. (In fact, some might even argue that market dips may be a time to invest more, since stocks are “on sale.”) Your Ellevest Private Wealth advisor can also help you think through strategies and decisions like tax-loss harvesting, rebalancing, investing excess cash, and realigning your portfolio with your long-term goals.

Above all, though, we believe that investing in a carefully thought-out asset allocation that’s diversified (fixed income, alternatives, international equities, etc.) is usually a smart course of action. Diversification can balance out the risks of whatever is going on in the stock markets and still give you the opportunity to earn the returns they can offer over time.

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Disclosures