- U.S. stock indexes began Thursday in correction territory as investors reacted to news that Russia had invaded Ukraine overnight.
- The broad stock market has outperformed its historical average return over the course of past conflicts.
- Investing experts say now might be a good time to assess your tolerance for risk.
Stocks were down Thursday morning as investors reacted to news that Russia had began to attack Ukraine overnight.
The latest losses have pushed U.S. stock indexes into correction territory — generally defined as a 10% decline from recent highs — for the first time in two years. In early trading Thursday, the S&P 500 sat more than 13% below its January peak.
For long-term investors, who may fear things will get worse before they get better, it's essential to put the potential impact of global turmoil into perspective, says Brad McMillan, chief investment officer for Commonwealth Financial Network.
"There's a lot of talk that this is going to be bad for markets, and the question you have to ask yourself is why?" he says. "There really isn't a lot of direct impact on markets, except that it's a scary thing. Scary things come and go."
That isn't to say that your portfolio couldn't dip deeper into the red. But history indicates that conflicts tend to have a short-term impact on markets, and experts say that investors would be wise to behave accordingly. Here's how.
Video by Helen Zhao
When the threat of war becomes imminent, investors tend to retreat, at least initially. In 24 cases of military or terrorist actions tracked by Sam Stovall, chief investment strategist at CFRA, the broad stock market showed an average decline of 1% on the day that bad news came out, and an average total decline, from peak to trough, of just over 5%.
But once conflict breaks out, investors tend to push markets back up in short order. The S&P 500 posted positive returns during World War II, the Korean War, the Vietnam War, and the Gulf War, for instance, according to the CFA Institute. In fact, the 11.4% average annual return during those periods outruns the index's long-term average return.
"The only geopolitical crises that arguably caused bear markets were the two oil shocks of the 1970s because both triggered recessions," economist Ed Yardeni wrote in "Predicting the Markets: A Professional Autobiography." "Geopolitical crises that don't cause recessions don't usually trigger bear markets."
Video by Courtney Stith
Some market-watchers have pointed out that Russia is a major global energy player, and that war could drive oil prices up to the extent that they'll significantly hamper the world economy. Stovall doesn't think that's reason to panic, but stresses that things could get bumpy in the short term. "Threats to global energy transportation could up uncertainty and therefore volatility in the market," he says. "But I don't think it will result in a financial panic or global recession, which is what you need to trigger a bear market."
Ultimately, Stovall says, the current situation puts investors in familiar territory. "This is simply a reminder that volatility is a natural part of the stock market," he says.
Experts generally recommend against making any wholesale changes to your portfolio based on short-term moves in the stock market. If you're a long-term investor, sticking to your plan and steadily adding to your portfolio in a strategy known as dollar-cost averaging ensures that you buy more shares during pullbacks, when stock prices go on sale.
If you feel compelled to take action, now might be a good time to assess your tolerance for risk, says McMillan. If thinking about your portfolio is keeping you up at night, or if you think you might panic and sell if things decline further, maybe it's time to pare back your exposure to more volatile assets, he adds.
"Take a look at your portfolio and make sure you're comfortable with the level of risk therein," he says. "This is normal volatility. If you're scared by this, you may want to consider adjusting, because you'll be terrified if we get a real pullback."
No level of diversification or asset allocation can ensure profits or guarantee against losses. The views expressed are generalized and may not be appropriate for all investors. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment.
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