In this month’s edition of “Money Matters,” Scott Oeth talks about the Russian invasion of Ukraine and how geopolitical events can affect the U.S. stock market. Scott also discusses what investors should do in times of uncertainty, such as the Russian invasion of Ukraine, to try to keep their financial investments and portfolio on track to meet their financial goals.

Scott discussed the Russian invasion of Ukraine and the stock markets with his private wealth management clients in a recent letter, which you can read, in part, here.

Money Matters: The Russian Invasion and Financial Uncertainty Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner, an adjunct professor, he's taught retirement planning and wealth management strategies to hundreds of financial professionals, and he's joining us now by phone. Welcome, Scott.

0:00:22.2 Scott: Good morning, CJ.

0:00:23.2 CJ: Good morning to you. So, let's get right into it. All the news is about the Russian invasion of Ukraine, and how is that sort of news affecting the market? What's the response?

0:00:36.8 Scott: Yeah. Well, really tragic news and it's been shocking to watch. You know, in regards to the market, it's a... We've already had good corporate earnings, good corporate growth. There's been a number of really strong factors going into the market. But early 2022, we've been wrestling with inflation over 7%. There's expectation of a series of interest rate hikes. We still have these supply chain issues. Valuations and stocks in certain sectors are really stretched and we've seen a sell-off in technology stock. So, that's kind of what's been going on already in 2022, and there's this overused truism that, you know, the stock market hates uncertainty. Well, now we have war in Ukraine and great uncertainty, and this is really expected to disrupt energy and commodity supplies coming out of that region.

0:01:27.3 Scott: Oil is already at $100 a barrel, and obviously great fears that this may devolve into a longer, prolonged conflict and so markets are jittery and they're trying to figure out what this all—what this all means. Really strong financial sanctions. It's been interesting over the last few days, seeing hour by hour different companies pulling out or banking regulations, things happening.

0:01:58.0 Scott: As of a day ago, Russian stocks and the ruble, their currency, both had plunged about 30%. So, a lot of uncertainty and here in our stock market, the way most people, say, North America are invested. You've seen some of that volatility in the market for sure. The S&P 500, which is a broad measure of the 500 largest US stocks, it touched the 10% down mark last week, which analysts like to call, "The correction." That's kind of where they note that and 20% down, which we haven't got there yet, can denote a bear market. So, a lot of prognosticators out there with attention grabbing headlines, people don't know exactly how this is gonna unfold, but I do think it'd be prudent to prepare yourself for a real economic and financial disruption.

0:02:52.3 CJ: Okay. So, can you give us sort of a historic perspective of this? We've gone through hard times before in the history of the country and in the stock market, wars and all sorts of things. Can you give us a little perspective on that?

0:03:08.3 Scott: Yeah, I think that's a great way. A great thing to look at CJ, and then we'll start with kind of a glum picture there, and there's a phrase, "History doesn't repeat itself, but it does rhyme." And I do like to look to history and look at market statistics, and the current events are gonna unfold in their own pattern, but there are often valuable lessons, observations. Certainly, observations about human nature, things like that, that can be gained from the past. Maybe the counterargument is that you have got to be careful with statistics because you could drown in a river that has an average depth of six inches.

0:03:44.4 CJ: Right.

0:03:44.9 Scott: It may be much deeper in the middle and much shallower on the outside, but in this case, I do think there are some important points because it sounds... It is terrible what's going on and from a financial standpoint, people are very concerned. I'm getting questions, and people are really wondering what the impact is, but if we do look to history in times of war, it actually... Financially has not always been that bad.

0:04:08.0 Scott: So, three pieces, I looked at that I thought were really interesting, Vanguard Group—big investment company—they looked at major geopolitical events for the last 60 years, and they found that while stock markets often reacted negatively initially, and there's a sell-off, it is often quite short-lived, that the returns six months out and 12 months out, were largely right in line with average events. And two pieces I saw in their study that really kind of caught my eye in 1979: the Soviets invaded Afghanistan. Markets initially sold off 5%. Six months later, they're up 6%. A year later, they're up 26%. Okay.

0:04:48.4 Scott: And in 2003, during the Iraq War, markets initially sold off down 3%; six months later, they're up 19%. A year later, up 27%. So, that Vanguard study is out there. I'm gonna have this post on my site, I think that's a good one. A very interesting one, a fellow named Mark Armbruster, a financial analyst, posted a piece called "What happens if America Goes to War?" on the CFA Institute site, and he looked at the big global conflicts: World War II, Korean War, Vietnam War, Gulf War.

0:05:20.5 Scott: And in his conclusion, he says both large company stocks and small company stocks actually outperformed and had less volatility during times of war. That's really remarkable. You'd expect that the volatility... I would... Before I'd read this, that it would be much higher during times of war with all the uncertainty and the conflict, but like one piece 1926 to 2013 overall return of large company stocks in his study, he had 10% and risk is measured by standard deviation returns. The volatility is 19%.

0:05:55.9 Scott: While during World War II, the large company stock index was up 16.9% and had lower than average volatility of 13.8%. So, very interesting, I've got that study posted as well, it breaks down those different conflicts and different categories in the market. And I think one final, CJ, I had a book on my shelf I pulled off over the weekend because it came to mind. Barton Biggs, who was a Global Chief Strategist at Morgan Stanley, wrote a book called Wealth, War & Wisdom.

0:06:25.5 Scott: It's a thick book, he spent a lot of time looking at what happened during World War II to markets, specifically in different countries, occupying forces, occupied countries. In his conclusion, right at the very end, he says, he spent all his time, this is his whole career, very serious professional financial analyst, he looked very closely at what happened during some of the darkest days in world history, and his conclusion, he says in the long place, stocks are the place to be because of their proven and virtually unique ability to increase purchasing power of capital. And he said, in my considerate but not necessarily correct opinion, he thinks the family or individuals should have 75% of their wealth in stock investments.

0:07:11.5 Scott: So, that's actually pretty high. A lot of people... Even in good times... Think that's a high stock allocation, but I think it really points to his conviction, having spent a lot of time looking at tragic times, how people should stay invested and not... What he did not say was, you should sell, go to cash and wait for the conflict to be over. So, I think those are... They offer some encouragement on the financial side that just because there are terrible headlines regarding the geopolitics of war, it doesn't necessarily mean that things are gonna be bad for your portfolio.

0:07:48.6 CJ: Okay, well, that's a semi-optimistic look at things going on right now, Scott.

0:07:57.8 Scott: Yeah, it is. Well, it is in terms of... I'm always a fan of taking the long view when it comes to investing. I think when you get into short-termism, that's when it gets tough. It's very easy to sit there when it's... When the weather is nice and sunny, so to speak, in financial terms, and say "We're gonna stay invested and we're not gonna sell when the market goes down." The problem is, in real life, this is what it feels like when the market goes down. Feels like there's economic uncertainty, there's financial uncertainty, and while there's big scary global news. These are the times. It looks easy on paper when you just look at a chart, and say, "Oh, you know, why would you sell?" Well, this is the type of pressure you feel in real life. So, I always think it's a good time for people to take a serious look, but it'd really be great for people to review their financial plans, make sure that their investments are aligning with their goals, and risks, and seek professional guidance and/or a second opinion.

0:08:52.2 Scott: Nothing I'm talking about here, I don't want people to take this as specific advice for them individually. Get that on their own, but there is, I think, a case to be made for saying, "Hey, if you have a good plan, stick with it."

0:09:08.6 CJ: Right, there's precedent. Well, thank you for referring people to those articles. We'll put this on our website so that they can reference it in the future.

0:09:18.8 Scott: That's great, thanks, CJ.

0:09:19.8 CJ: Alright, thank you.