The Russian invasion of Ukraine shook financial markets around the world. The resulting rollercoaster stock returns, rise in the price of oil, and fears of cyberattacks can leave you uncertain about your investing strategy. How should you handle your portfolio during times of great uncertainty?
If you took the time to create a solid risk profile before the event, you probably should do nothing at all. Your risk profile is composed of your investment goals, the time by which you want to achieve your goals, the return you need to achieve them, and your appetite for taking risk.
Sometimes, however, you lose that appetite and want to adjust your portfolio. Often, you can lower risk in your investments by reducing your stock positions; however, you need to proceed with caution.
First, talk to your financial planner about the reasons for your existing decisions. He or she may be able to help you better understand your current asset allocation and why it’s the best strategy. However, if you still want to make changes, keep some factors in mind.
First, avoid either/or thinking. Often during times of stress, I hear people say that they want to sell all their stocks and bonds and go to cash. That may not be a good idea for several reasons.
First, your investment portfolio likely contains both stock and bond funds. During financial crises, these two types of investments can react differently. The morning after the Russian invasion, as stock funds were at their daily low, bond funds were at their daily high. That afternoon, as the stock market recovered, the bond funds began to decline. Before placing the trades to sell everything, look at how your investments have responded to the new crises.
Additionally, it’s difficult to know how the markets will respond to events. If you sold all your stocks the morning after the invasion, you would have locked in declines that reversed during the afternoon. None of us have a crystal ball, and it’s easy to react out of emotion and make investing mistakes.
Instead, if you want to lower your portfolio risk, consider selling some stock positions but not all of them. That way, if the market recovers, you still have a possibility of earning a positive return. The further into a decline, the more you need to be careful not to lock in losses by selling near the bottom.
If you decide to adjust your portfolio during a time of crisis, when will you return it to its “normal times” allocation? What will trigger your reentry? Often after a significant decline, like the dot.com crash of 2000 or the real estate bubble of 2008, people become fearful and stay out of the market for an extended time. This behavior causes them to miss the rebound and can lead to the mistake of selling low and buying high. Make a plan to avoid getting backward to market movement.
Greed and fear can cause emotional reactions to the stock market. Indeed, this week’s Ukraine invasion news is scary. Remember that your original financial decisions are, most likely, the best. However, if you still want to make investment changes, take the time to calm your emotions, think through your options, and proceed with a plan.