Geopolitical Conflicts and the Market (ADV)
Throughout the history of the financial markets, there have been countless events that have increased volatility in the market. It is no profound assumption to say that this will continue for the rest of time. While the past is never a definite predictor of the future, we can assess the potential effect of current events by comparing them to the relative magnitude of many similar historical events. The table below shows the market’s reaction to 22 military conflicts and terrorist events, as well as the length of time it took to recover from said event.
The story being told is one that emphasizes the short-lived nature of the volatility typically created by each of these events. Notice how not one of the conflicts presented caused a recovery to last an entire year. On average, recovery was achieved in around a month and a half. So how does this tie in with how we are managing your financial livelihood? Market shocks such as these present unique opportunities to be tactical with capital, such as shifting funds from one holding to another.
In addition, if there is any excess cash being averaged into the market, we can accelerate the investment to capture the lower prices available. The best way to describe the reasoning behind this is to reference a quote by economist Benjamin Graham, often called the “father of value investing.” He characterizes the market as a pendulum that forever swings between unsustainable optimism and unjustified pessimism. An intelligent investor is a realist who sells to optimists and buys from pessimists. This means deploying capital when stocks are on the way down, as counterintuitive as that sounds. Notice how fully liquidating a portfolio and sitting on the cash without a plan is not part of what makes an intelligent investor. While sitting on cash can act as a cushion when markets are going down, it becomes a sandbag on the climb back up. This is why the adage “it’s not about timing the market, but time in the market” has been proven true over the years. The consistent result of not being in the market is underperformance for a long-term investor. The graph below depicts the consequences of missing out on key positive days in the market compared to holding through all days, negative and positive.
While looking at this data can provide peace of mind in our financial well-being, we should never forget that there are people just like us who are having the fruits of their labor destroyed over a thirst for conquest. Those affected by the recent events in Ukraine are in the thoughts and prayers of each and every one of our team members at CPC. We wish that peace will be achieved swiftly and with minimal damage going forward.
