The Invasion of Ukraine and your Retirement Plan

The Russian invasion of Ukraine is disturbing. An action like this will have a significant impact around the world, and it will undoubtedly have an impact on the global economy. This uncertainty has a lot of people wondering what will happen to their investments and broader retirement income plan.

Every situation is unique, but historically the markets have tended to rebound relatively quickly after big geopolitical events (markets actually tend to rebound relatively quickly after any significant market decline). As we can see from this Vanguard chart, markets tend to fall immediately after a big geopolitical event (as you would expect – geopolitical events are rarely happy things), but across the events they examined, on average, the markets were up 5% six months after the event, and 9% one year after the event.

Just like always, there are no guarantees. As you can see, Nixon’s impeachment didn’t fit the pattern, and we do not fit the pattern so far during the current crisis either. Yesterday, February 24^th, was the first day after the invasion, and the S&P 500 Index was actually up 1.5% for the day. But understanding the history is instructive and can help contextualize what is going on in the markets.

One of the important things to keep in mind when we think about investment returns is that markets move based on expectations. The financial markets are inherently forward-looking and include not just all of the available information about what has just happened, but also the market’s expectations of what will happen in the future. It is not as simple as saying, “if something good happens, the market will go up, and if something bad happens, the market will go down.” Rather, it’s about how events square with what the market expected. If events are better than expected, prices will go up, and if events are worse than expected, prices will go down. This means that even though we are in an uncertain period, to say the least, that does not mean that the near-term returns are necessarily going to be negative (or positive). Just like always, it means that we don’t know.

And that is simply part of investing in the stock market. There’s always going to be something happening. Whether it was the situation in Greece, Brexit, something going on with China, an inverted yield curve, the coronavirus, the market being at historic highs, or even the market not being volatile enough, we can always point to some reason that the market is in trouble. We can always find trouble on the horizon if we want to look for it. And we always want to look for it.

We shouldn’t ever look at any aspect of our retirement plan in isolation. Instead, each piece should be viewed as an integral part of the larger whole. Some investors seek out the higher expected returns (and can tolerate the elevated levels of risk) associated with investing in stocks. For others, the comfort of having most, or sometimes all, of their retirement “paycheck” coming from reliable sources takes precedence when making asset allocation decisions. Most of us will fall somewhere in the middle, having some amount of guaranteed income paired with a mix of stocks and bonds. The right plan – one that complements your unique retirement income style – is designed to help meet your goals while allowing you to sleep comfortably at night. There is no single right approach, only the approach that is right for you. It’s all about finding the approach that will help you stay disciplined through the turbulent times that we currently face and will inevitably face again in the future.