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UPDATED 04/03: Ukraine and the markets

We are deeply saddened by developments in Ukraine. As the situation continues, we feel that keeping our clients fully informed about the potential impact on their investment portfolios is an important part of our service. We will be regularly updating this post with any developments that are pertinent.

UPDATE 10/03: We’ve rebalanced our portfolios

Given the rapidly developing situation in Ukraine, we decided that the time was right to rebalance our portfolios. You can find the full details of the changes we’ve made here. In short, the rebalance was designed to make our portfolios are robust as possible against a number of potential scenarios.

We will continue to monitor the situation and make any further changes if necessary. The key trends we’ll be looking at will be inflation, European growth, volatility and any change in the expected course of action from central banks.

UPDATE 04/03

As we look back at a deeply troubling week in Ukraine, our thoughts are with anyone directly affected by the ongoing attack. We strongly condemn the unprovoked Russian aggression and stand with Ukraine, as the world hopes for a resolution and the swift restoration of peace in Europe. 

At Moneyfarm, our role as a wealth manager means that, as well as following the humanitarian crisis at the heart of the situation in Ukraine, we see informing you about the development of the market as part of our job. At the same time, rest assured that we don’t want to detract from or minimise the tragedy of the unfolding crisis.

The response from governments and businesses across the world has been decisive and united. Russia has been largely removed from many aspects of the global financial system. Index providers have begun to remove Russian assets from the indices that underpin many of the ETFs that we use and we absolutely support that decision.

European equities have suffered as the crisis has gone on. Commodities have rallied strongly driven by a record week for Oil – this is due to expectations of supply issues arising from potential sanctions, or Russia cutting off the supply of gas.

However, the diversification benefits of the portfolio have shown their value, as bond prices increased, again led by inflation-linked bonds which rallied in light of higher inflation expectations coming from the increased energy prices and other related issues. On top of this, though US equities were slightly negative, a rally in the dollar allowed the US holdings in the portfolio to provide some relief. This helped balance the negative impact of European equities. 

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Our Investment Committee met several times during the course of last week. The main focus is to understand and study how this crisis will impact the long-term outlook for the asset classes we hold in the portfolios, and if the changes in risk premiums justify a change in our positioning.  

Finally, as a company, we will continue to support Ukraine where possible, including our co-workers in the country hoping that the situation will be resolved as soon as possible. 

What investors should do

For investors, our advice is the same as it has been during similar crises. That is, to stay the course and resist the urge to disinvest as a way to protect your wealth. In many cases, this can have the opposite effect – disinvesting during market turbulence is a surefire way to crystallise your losses and can lead to you missing out on the recovery. 

It is, after all, the recovery that is the most important part of any economic downturn. After every major dip in the last 20 years – Covid-19 included – markets have eventually rallied and seen a sharp, often speedy recovery. Trying to time the market is risky; missing out on even a day or two of the recovery if and when it does come can be the difference to your long term results. 

To assess the impact of withdrawing from the markets, we examined the growth of two identical hypothetical portfolios. One portfolio (from a particularly poorly timed investor) was pulled out of the markets during the four major dips over the last 10 years and only reinvested once markets had recovered, while the other stayed the course and waited for the seas to calm. In this example, missing the bounce led to a portfolio that was around 35% lower than one that stayed the course. 

This was echoed in what we saw when the pandemic first hit in 2020. There were three types of investors: those that panicked and disinvested, those that stayed the course and those who decided this was actually an opportunity to invest more. Now, in the aftermath, we can see that those that disinvested suffered a blow to their long term savings, missing the rally that came on the other side. Whereas the other two groups were rewarded; those that added more thrived.

Of course, past performance is no guarantee of future returns and we can’t be certain of a timely recovery despite the historical precedent. Regardless, we believe the best course of action is to remain invested, keep the faith, and wait for a recovery to give your portfolio the best chance of growing. As always our consultants are on hand to answer any questions or address any concerns. Please give us a call, book an appointment or drop us an email if you want to discuss anything further.

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