How to manage your money amid global unrest
With Russia’s internationally condemned invasion of Ukraine, one thing is certain: No one knows exactly how things will play out.
So far that disturbing uncertainty hasn’t sent markets into a sustained tailspin. US stocks took a hit the week of the invasion, but have since recovered some of those losses. But the market is likely to experience volatility as events unfold.
“It’s hard to call this one,” said Florida-based certified financial planner Mari Adam. “We just don’t know.”
But if you’ve been concerned about whether the geopolitical turmoil might negatively affect your savings and investments, here are a few ways to assess your situation and guard against potential losses.
Don’t trade on the headlines
Rapid-fire news reports about soaring energy and food prices or talk of a potential world war or nuclear attack are unnerving.
But history often shows that making financial decisions based on an emotional response to major events is often a losing proposition long term.
“Making a radical change in the midst of all this uncertainty is usually a decision that [you’ll] regret,” said Don Bennyhoff, chief investment officer for Liberty Wealth Advisors and a former investment strategist at Vanguard.
Look back at periods of war and other crises in the last century and you’ll see that stocks typically came back faster than anyone might have expected in the moment, and did well on average over time.
For example, since the financial crisis hit in 2008, the S&P 500 returned 11% a year on average through 2021, according to data analyzed by First Trust Advisors. The worst year in that period was 2008, when stocks fell 38%. But in most of the years that followed, the index posted a gain. And four of its annual gains ranged between 23% and 30%.
If you go back as far as 1926, that annual average return on the S&P has been 10.5%.
“Staying the course may be hard on your nerves, but it can be healthiest for your portfolio,” said Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab.
That’s not to discount the seriousness of nuclear threats and the chance that this period could diverge from historical patterns. But were things to truly escalate globally, Williams noted, “we’d have more to be concerned about than our investment portfolios.”
Instead of making changes based on your reaction to the latest events, first review your financial situation holistically.
Cover your near-term cash needs
It’s always a good idea, but especially when confronted with big events beyond your control, to make sure you have liquid assets for your most urgent needs.
That means enough money set aside in cash, money market funds or short-term fixed income instruments to cover near-term tax payments, unexpected emergencies and any big, upcoming expenses (e.g., a down payment or tuition).
This is also advisable if you are near or in retirement, in which case you may want to have enough liquidity to cover a year or more of the living expenses that you would ordinarily pay for with withdrawals from your portfolio, Williams said. This should be the amount you would need to supplement your fixed income payments, such as Social Security or a private pension.
In addition, Williams suggests having two to four years in lower volatility investments like a short-term bond fund.
That will help you ride out any market downturn should one occur and give your investments time to recover.
Review your risk tolerance
It’s easy to say you have a high tolerance for risk when the S&P 500 keeps setting record highs. But you have to be able to stomach the volatility that inevitably comes with investing over time.
So review your holdings to make sure they still align with your risk tolerance for a potentially rockier road ahead. And while you’re at it, figure out what it means to you to “lose” money.
“There are many definitions of risk and loss,” Bennyhoff said.
For instance, if you’re keeping money in a savings account or CD, any interest rate you’re earning is likely being outpaced by inflation. So while you preserve your principal, you lose buying power over time.
Then again, if it’s more important to preserve principal over a year or two than risk losing any of it — which could happen when you invest in stocks — that inflation-based loss may be worth it to you because you’re getting what Bennyhoff calls a “sleep-easy return.”
That said, for longer-term goals, figure out how much you feel comfortable putting at some risk to get a greater return and prevent inflation from eating away at your savings and gains.
“Over time you’re better off and safer as a person if you can grow your wealth,” Adam said.
Rebalance your portfolio
Given record stock returns in the past few years, now may be a good time to rebalance your portfolio if you haven’t done so in a while.
For instance, Adam said, you may be overweight in growth stocks. To help stabilize your returns going forward, she suggested maybe reallocating some money into slower-growing, dividend-paying value stocks through a mutual fund.
Make new investments slowly
If you have a large lump sum — maybe you just sold your business or house, or you got an inheritance or big bonus — you may wonder what to do with it now.
Given all the global uncertainty, Adam recommends investing it in smaller chunks periodically — e.g., every month for a given period of time — rather than all at once.
“Space out your investing over time since this week’s news will be different than next week’s news,” she said.
In the months leading up to Russia’s invasion of Ukraine, the expectation was that the Federal Reserve would be hiking interest rates multiple times this year to curb high inflation.
Now? Maybe not as much.
“The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions, and of events to come, remain highly uncertain,” Federal Reserve Chairman Jerome Powell told lawmakers on Wednesday. “Given the current situation, we need to move carefully.”
That could push government bond prices higher and rates lower, should investors seek US Treasurys as a safe haven on a sustained basis. And it could mean that interest rates on savings may not move as high as they might have when everyone expected the Federal Reserve would hike rates substantially this year.
Do your best. Then ‘let go’
Keep in mind: It’s impossible to make perfect choices since no one has perfect information.
“Collect your facts. Try to make the best decision based on those facts plus your individual goals and risk tolerance.” Adam said. Then, she added, “Let go.”
By Jeanne Sahad