Amidst Geopolitical Instability, an Opportunity to Learn from Past Market Drawdowns
Concerns about Russia’s invasion of Ukraine have weighed heavily on Wall Street in recent days, including this week’s broad declines that saw the S&P 500 close in correction territory. While we know current events are not easy to watch, it is important to recognize that the market’s response isn't unexpected. Much of the recent downturn was already factored in, as is the case in most market drawdowns. The S&P 500 actually closed up 1.5% at the end of the day, the day of the invasion, and the Nasdaq finished up 3.3%.
Market corrections are not uncommon. According to Forbes, since 1928, a correction of at least 10% has happened in the S&P 500 about once every 19 months. Of the 27 corrections since World War II, the index has experienced an average decline of 13.7%. Below are the most recent notable drawdowns:
Historically, foreign wars have not had a sustained long-term impact on stock markets. There’s reason to believe that will be the case here as well. Jason Furman, Harvard economist and ex-adviser to President Barack Obama recently stated that Russia’s economy is “incredibly unimportant in the global economy except for oil and gas.” The market seems to agree as it remains largely unphased by the situation today.
To mitigate your risk when the market declines, diversification is the best strategy. This extends beyond simply having an appropriate mix of stock and bond investments. Diversification includes adding asset classes like real estate and other alternatives that don’t correlate as strongly to traditional stocks and bonds. In addition, diversification includes investing internationally to take advantage of opportunities in both foreign developed markets and emerging markets.
If you are diversified, now may also be a good time to reallocate or rebalance your portfolio to adapt to recent swings. Always set a target asset allocation for each asset class in your portfolio. This includes sub-asset classes of stocks and bonds. It also includes domestic and international stocks and bonds as well.
If you have had a watchlist of additional investments (as part of an overall portfolio strategy) it may also make sense to invest in them soon. Consider exposure to energy and defense sectors. But any such investment should be made with the expectations of near-term volatility. Over the last 10 years, some drawdowns have persisted for more than 100 days.
While we don't know the final outcomes of these recent events, history has proven that diversification combined with a long-term portfolio strategy, not sudden or reactionary measures, is the best overall approach to investing.