Global markets including India are in the red due to the Russia-Ukraine crisis and the seemingly looming Russian invasion of Ukraine. The global markets were already weak since the start of 2022 and this latest crisis is making it worse. “Experts” think that this could be the Archduke Franz Ferdinand moment that triggers World War 3. The “experts” want you to believe them.
How many times have we seen such stories play out? Look, if you’re actually worried about this, there’s always something to worry about in the world. If you listen to the news, you’ll get the feeling that we’re just a week away from the apocalypse. But at the risk of sounding flippant, if you zoom out, you’ll see that we’ve survived hundreds of war scares and plenty of actual wars and still come out on the other side. Remember the India vs Pak and India vs China skirmishes in the last couple of years? Yet, we’re still here.
And when there’s red, common sense tends to escape our head. We end up doing things we’ll definitely regret later.
If you are investing for 20-30+ years for your retirement, all these events make very little difference. Assuming that the Russia-Ukraine crisis does end up triggering World War 3, your portfolio will be the least of the worries.
If you’re still wondering if you should do something, you have 2 choices
1. Talk to Vladimir Putin
If you have a direct line to Putin and if you can convince him not to invade Ukraine, then you should do that. That solves the problem.
2. Have a diversified portfolio and go do something productive
If you can’t WhatsApp Putin, remind yourself that we all suck at making predictions, and reacting at the moment would be monumentally stupid.
You can’t predict, but you sure can prepare.
The best insurance for ignorance and stupidity is asset allocation. By diversifying across equities, debt, and gold, you are spreading your risks, thereby reducing it.
Here are the mutual fund category returns for equity and hybrid categories. Hybrid funds invest in equity and debt, while multi-asset funds invest in equity debt and gold. I can make fancy charts to make the same point but take a look at the returns to get a sense of how asset allocation and diversification reduce the downside risk. That’s the best we can do. I don’t have a clue what’s going to happen, and neither does anybody else, and this is how you prepare for the unknown.
| Mutual Fund category | [1 month returns] |
|---|---|
| Equity: Large Cap | -2.93 |
| Equity: Large & MidCap | -4.85 |
| Equity: Flexi Cap | -4.28 |
| Equity: Multi Cap | -4.72 |
| Equity: Mid Cap | -6.25 |
| Equity: Small Cap | -8.67 |
| Gold | 3.08 |
| Hybrid: Aggressive Hybrid | -3.22 |
| Hybrid: Balanced Hybrid | -1.23 |
| Hybrid: Conservative Hybrid | -0.49 |
| Hybrid: Dynamic Asset Allocation | -1.73 |
| Hybrid: Multi Asset Allocation | -1.66 |
| Source: VR | |
| Aggressive Hybrid: 65% to 80% in equity and rest in debt. | |
| Balanced Hybrid: 40% to 60% in equity and rest in debt. | |
| Conservative Hybrid: 75% and 90% in debt and rest in equity. | |
| Dynamic Asset Allocation: No equity debt limits. Allocation at the discretion of the fund manager. | |
| Dynamic Asset Allocation: Minimum 10% in equity, debt, and gold. |
This is pretty much what I had written in a recent post about do’s and don’ts when markets are volatile.
We aren’t meant to be investors
One thing that I always find useful is to remind myself that we weren’t meant to be long-term investors. Evolutionarily, our biggest priority was to survive and reproduce. So, we were programmed to run at the first sign of danger. Thousands of years later, our brain is still the same, it’s wired to think short-term and investing requires the opposite. So the moment the market falls, and we see red, our brain perceives it to be a threat and that’s the reason why we feel like selling. Our impulse is to protect the money we have today than take risks to watch it grow tomorrow.
A metaphor that O’Shaughnessy uses to explain behavioral bias is that humans have “hardware” that has not evolved sufficiently to deal with a very different world. For example, human decision-making heuristics that evolved more than 50,000 years ago when it was a good idea to do things like run away when you saw a rustle in the bushes don’t always serve humans well in a modern world. Biases like loss-aversion, recency, and availability cause humans to repeatedly make mistakes in activities like investing. Understanding this reality is helpful for an investor since it should help teach you the importance of being humble about your ability to make forecasts successfully and the value of consistently avoiding stupidity. - Tren Griffin on Jim O’Shaughnessy
Geopolitical events and the markets
But in any case, like I said earlier, most of these geopolitical events and risks don’t matter. The markets react in the short term, but don’t really care after a few months. Since the US markets have a longer history than India, here’s how the S&P 500 has performed through wars and other geopolitical crises. 90%+ of the time, the markets quickly recover after the initial reaction.
Source: Reuters
Switch off the news, stop reading the apocalyptic nonsense and focus on something that’s actually useful instead of fussing about your portfolio. Unless you’re a short-term trader, all this is utterly pointless.
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