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10 Answers Regarding Investments and the Conflict in Ukraine

Most of us were shocked by Russia's invasion of Ukraine. The geographical proximity of the conflict, the unprecedented and unpredictable rampage of the Russian authorities raise many questions and spread uncertainty. Hence, we are bringing you rational, fact-based answers to questions regarding investing you are probably concerned with.

Radoslav Kasík | Investment academy | 16. March 2022

10 essential questions most investors are asking today:

Keep in mind that any decision made in a rush of emotions usually leads to undesirable results. This is especially true in finance, where feelings should not affect judgment at all.

How Will the War Affect the World Economy?

The impact of the Russian invasion can be analyzed on several levels:

  • Inflation: The conflict’s most visible impact will be an increase in prices. Inflation was problematic before the war’s outbreak already. Russia's preparations for an attack raised its levels. Both Ukraine and Russia are major global suppliers of raw materials ranging from energy commodities to industrial and agricultural products.
  • GDP: Both parties of the conflict do not represent significant economies on a global scale, especially in terms of consumption and industrial output. The impact on global economic growth, in this respect, will be negligible.
  • Uncertainty: War, on the other hand, can affect economic and consumer sentiment, which may lead to postponing consumption and corporate investment decisions. However, the effect will be short-lived, taking into account the ending pandemic. High inflation will negatively affect the economy. All the effects will primarily influence European economies. The US and Asia will be more resistant.
  • Performance of global firms: Most key firms have no relevant operations in the former Soviet republics, which account for only a negligible fraction of their customer markets. The crucial world economies are the US, China, and Europe. Only the Old-Continent firms’ performance will be afflicted.
  • Interest rates: The situation is becoming more convoluted for central banks. The deteriorating sentiment is delaying potential interest rate hikes, which was already reflected in the financial-market expectations after the invasion. On the other hand, however, higher inflationary pressures push in the opposite direction. In this case, we are more inclined to believe that concerns about economic developments and the need for liquidity in the markets will prevail, at least in the short term, and upward pressure on interest rates will subside.

However, we must bear in mind that it is very difficult to predict the development of the situation in Ukraine, but also on a global scale.

What Will Be the Market Response and Future Development? 

Financial markets are, naturally, reacting to the situation. The impact has been felt for several weeks now, as Russia has been amassing troops on Ukraine's borders for some time, clearly preparing for an attack, and Western leaders have been warning intensely of an imminent conflict based on intelligence information.

The market response itself, therefore, was not so rapid on the day of the invasion. It had already been factored into the prices of traded assets to some extent:

  • Stocks fell, but e.g., US equities completely erased the morning losses by the close of trading, ending up with solid gains.
  • Government bonds rose, thus fulfilling the role of a safe-haven asset. However, some of the gains were erased during the day, demonstrating the easing of investor concerns.
  • Commodities were afflicted by the conflict most acutely. Prices of oil, gas, crops, as well as industrial metals, jumped to multi-year highs and are likely to remain elevated for a longer period.

Financial markets are generally unpredictable in the short term, regardless of specific world events. However, history can be a guide for investors. Over the long term, markets rise. That is the only certainty we can operate with.

Even military conflicts do not generally have a major negative impact on financial markets. The initial reaction is usually a downturn, but the turnaround happens while the conflict is still ongoing.

For example, since 1941, the US S&P 500 stock index has responded to various geopolitical events with a 5% decline on average. It has generally taken only a few months to recover. For example, Iraq's invasion of Kuwait and the subsequent US response caused a 17% drop and the index took 189 calendar days to recover.

Equity markets will remain turbulent in the coming weeks and we can’t rule out further declines. In the same spirit, we can’t rule out that we’ve already seen their trough.

What Style of Investing Do You Recommend in the Current Situation?

Nothing changes about the ideal investment. Whatever happens in the world is not a reason for adopting a specific investment strategy.

Invest passively over the long term to build as much wealth as possible. There are not many successful investment strategies. Stick to the time-tested ones.

The key to a successful strategy is sufficient diversification, an adequate investment horizon with a portfolio allocation tailored to that period. It is in situations such as the one we’re experiencing today that these three points represent crucial prerequisites of a successful investment.

Do not try to time the markets or withdraw funds in the hope of buying for a better future price. Do not pick regions, sectors, or companies that could be winners of this conflict. You won't succeed.

Just remember the pandemic outbreak two years ago. Many investors, commentators, and the media were expecting a record post-war decline in stock markets. Before they knew it, the indices had bottomed out and embarked on a wave of tremendous growth that many investors missed because of their mistaken expectations.

In situations such as the start of a pandemic or the current outbreak of conflict in Ukraine, emotions run high. Social networks are full of unpleasant news and cruel images. Each of us naturally thinks of the most negative scenarios at such moments.

However, we do not have sober rational thinking. Making decisions based on emotions is flawed in every situation in life, especially those concerning finance. Don't make decisions about your investments with a horizon of ten, twenty, or thirty years, based on 24-hour feelings.

Nothing changes the fact that inexpensive passive investing with a well-set rebalancing, diversified portfolio with the right allocation matched to the investment horizon is the ideal way to build wealth.

History regularly proves these facts, and this time will be no different.

A market downturn, no matter how harsh the reasons, is always an opportunity.

What Should I Do If I Invest Regularly?

Absolutely nothing. Continue to invest regularly. With regular investing, a downturn in the markets is a positive event, especially if you are at the beginning of your investment horizon.

By making your investment purchases cheaper, i.e. buying at lower stock prices, you get more ETFs for the same amount of money, thus buying more stocks and bonds.

The deposits made at the beginning of your investment journey will be earning returns for the longest time, meaning the compound interest effect will impact them the most. The more favorable the price of these purchases, the higher the expected returns.

I Hold a Large Portion of My Wealth in Stocks, What Should I Do?

This week, investors will make more mistakes than throughout the rest of the year combined. Seeing our investment value decline is unpleasant for all of us, but it is an integral part of investing that you are constantly reminded of. Risk is the price of higher returns. You can't make money without taking it.

Don't get rid of your investments. The likelihood that you will be able to buy them back at a discounted price is very low. The bottom in the markets is very hard to locate precisely and usually comes much sooner than the underlying cause is resolved.

Moreover, it is psychologically difficult to get back into the market at the right moment. Once the prices rise above your selling ones, emotions will get even stronger. You will end up spending too much time out of the market, losing a large portion of potential returns. Only invested money earns returns.

The unequivocal recommendation and time-tested solution are to stick to your plans, i.e. perform no deviations from your setup at the beginning of the year. Do the same in terms of your investment amounts and strategy.

Unfortunately, military conflicts are a very unpleasant and distressing situation, but they are not uncommon in human society.

Your investment strategy, set according to your objectives, situation, and risk profile, also takes into account geopolitical events of this type. The historical average return, which is also probable in the future, reflects various negative social events. The period on which it is based was intertwined with several wars.

The current Ukrainian conflict is no reason to change your plans. A low state pension, your children's education, home renovation, or other goals still await you in the future. Your strategy accounts for the risks and is the most effective way to implement your plans.

It has been set for you assuming the funds will remain invested for many years to come. The basic prerequisite for reaching your destination is not to stray from the set route. 

If you have larger savings in your bank account, utilize the downturns to increase your invested amounts.

Is It a Good Time to Invest Extra Money or Should I Wait?

As mentioned above, it is impossible to predict the exact market development in the coming weeks and months. However, you seek to invest for many years rather than a few weeks. On this horizon, the financial markets have always had only one direction, and that was up.

Every downturn is a good opportunity to buy at a better price. If you have a sufficient horizon, you will most certainly multiply the value of your investment in the future. Count on the fact that the current downturn may not be the final one.

If you possess a larger amount of savings, or you have set aside funds, aiming to invest them during a downturn, be sure to direct at least some of them into the market.

Should I Spread a One-Off Investment Out or Invest It All at Once?

We can't rule out another stock market downturn. However, only invested money earns returns in the long run. If left in the bank account, inflation will devalue. These are the only two certainties you have as a saver and investor.

Statistically, it is certainly more profitable not to postpone investments, i.e. not to spread them out.

Either way, when investing, it is extremely important that you feel comfortable with your deposits. So if the question of spreading the investment out is to decide whether you enter the stock market or not, feel free to split it. Investing at least some of your cash savings will always be more profitable than not investing at all. Feel free to set aside the rest of your funds for any further downturns and potential averaging of purchase prices.

Can I Lose Everything by Investing?

Not in Finax. Via index ETFs, we invest in 7,400 stocks and 6,000 bonds across the globe. These are the largest global companies and bonds of 92 countries.

It’s nearly impossible to imagine a situation in which all these entities went bankrupt.

This fact is a great advantage of broad diversification. Hence, the loss in passive investing is always only temporary. Sooner or later, the value of the investment will return to its pre-crisis figure and continue to yield returns as the companies increase their profits over the long term.

For this reason, any downturn in stock markets primarily represents an investment opportunity.

Will the Conflict Spread? Is Slovakia also at Risk?

Most likely not. Russia's operations already are humanly and financially demanding for the country. In our view, attacking a NATO member country represents a much greater challenge and a different level of conflict even for the unbridled and unpredictable president Putin.

But the clouds of conflict in Ukraine, the tensions, and the potential threat to other European countries will probably remain hanging over our heads for a long time to come.

We do not consider subordinating our lives to pessimistic scenarios for a long period an appropriate life approach. You may end up spending years in anxiety and miss out on life. After that, unrealized investment goals such as insufficient pension or lack of funds for other expenses will catch up with you.

Having wealth makes your life better regardless of your social situation. It is having assets and enough money that protects you and gives you a solid edge even in critical situations.

A sufficient emergency fund remains the foundation. Heated social situations such as the past pandemic or the current conflict constantly convince us of its importance and value for life.

Should I Hoard Cash and Limit Consumption?

To some extent, you should always behave this way. The more of your income you set aside, the bigger the cushion of assets you build up, and the sooner you become financially independent.

We do not recommend a behavior change because of the conflict. Reassess your emergency fund to see if it is truly sufficient. Reviewing your expenses to eliminate unnecessary ones can’t turn out wrong.

Prepare for higher prices of essential goods and energy. In this respect, looking for potential savings makes sense at any time, even in peaceful times of economic prosperity.

Don't panic and don't push the accumulation of savings or inventories to extremes. You are very likely to lose money by doing so.

Thoughts of all of us are with our Ukrainian neighbors. We hope and firmly believe that the conflict will soon come to an end with minimal losses of human lives. However, do not forget your future besides that. Stay safe and healthy.

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