4 questions investors should ask as stocks react to escalating Ukraine-Russian war


Stocks these days are much like the weather – only much harder to forecast.

For one hour of a trading day, you might be tempted to sit back and relax in the sun. But the next hour, you’ll wish you left home with an umbrella as stocks start plunging.

Much of that volatility is resulting from Russia’s invasion of Ukraine.

This week, a 40-mile convoy of Russian tanks and vehicles was heading toward Ukraine’s capital, Kyiv. In response to Russia’s actions, the U.S. and EU allies have imposed hefty sanctions on the country, hitting Russian elites as well as ordinary citizens, leading to widespread bank runs and a sharp depreciation of the ruble.

LIVE UPDATES: Russian attacks intensify as mayor of Kharkiv vows city ‘will always stand’

ECONOMIC FALLOUT: Russia’s attack on Ukraine will lead to a bigger impact on US economy as it pushes gas prices, inflation higher, dents confidence

Research shows that acting on emotional impulses during heightened stock market volatility, and in general, has rarely been a good strategy. At the same time, doing nothing can leave you feeling like a sitting duck as stocks seesaw.

Instead, investment advisers say now is the time to hit the reset button on your portfolio and ask yourself four crucial questions.

What are my investment goals?

There are endless reasons why people invest besides earning more money. Perhaps you’re looking to buy a house, fund your child’s college education down the road, or be able to retire comfortably.

Whatever the reason, consider when you expect to make use of the money you’re investing.

Markets have been swinging sharply after Russia's invasion of Ukraine threatened to push the high inflation squeezing the global economy even higher.

Markets have been swinging sharply after Russia’s invasion of Ukraine threatened to push the high inflation squeezing the global economy even higher.

For instance, if you’re not planning to touch the money for another five to 10 years, “then what difference does it make if stocks are down 10% since the beginning of the year?” asks Matthew Benson, a certified financial planner and owner of Sonmore Financial. Historically, market corrections (those 10% drops) tend to be short-lived, and in the long run, stocks have positive returns.

Your investment goals should inform your risk appetite, Benson adds.

What is my tolerance for risk?

It’s no secret that taking on a lot of risk by investing in assets that are prone to big price swings, like commodity futures, or are hard to sell off, like real estate, can often mean reaping higher rewards than playing it safe. But it also means you’re vulnerable to losing more money.

“It’s one thing to say you’ve got a high-risk tolerance,” says Jack Janasiewicz, a portfolio manager at Natixis Investment Managers Solutions, but it’s another “when you have volatility in your portfolio and it’s making you uncomfortable, then yeah, you probably need to take a step back and reassess your risk tolerance.”

BACK TO THE BASICS: What is a stock market correction? And will it get worse as Russia invades Ukraine?

SUBSCRIBE TO THE DAILY MONEY: Russia-Ukraine invasion’s impact on stock market and natural gas

A good exercise to determine your risk tolerance is to consider how you would feel if markets went down by 5%, Bensen said: “Do you have a panic attack? What about if they’re down 10%? 15%? 20%? At what point do you say, ‘That’s too much’?”

Ultimately, your risk tolerance should line up with your investment objectives and time horizon, investment advisers told USA Today.

What’s the risk of avoiding risk?

First and foremost, “evaluate what it is that unnerved you,” and made you consider safer investments, says Mark Luschini, chief investment strategist at Janney Montgomery Scott.

“If it’s a deep drawdown like we’ve had here in equity prices, is now the best time to be selling into this environment …or might there be a better time?” he added.

If you determine that you’re taking too much risk and want to move into safer assets like bonds, consider that “there’s risk in all investments,” Bensen said. “If we stick to cash, for instance, we’ll get punished by inflation.”

BEST INFLATION INVESTMENTS:An adviser studied 95 years of returns to find an answer

STATE OF THE UNION ADDRESS: From Ukraine to inflation: 5 things to watch for

But if the Fed sticks to its plan and raises rates this month and continues to do so, keeping more cash in the bank might not be the worst idea, said Colleen O’Callaghan, managing director and wealth partner at J.P. Morgan’s wealth-management division.

In that case, “we’ll suddenly have a market where, you’ll actually be able to obtain some yields from cash.”

Do I have enough diversification in my portfolio?

A golden rule of investing used to be that some 60% of your portfolio should be in stocks and the remaining 40% in bonds. But the current inflationary, low-interest-rate environment has weakened that case because returns from bonds have been negligible.

By the end of last year, the typical 401(k) portfolio from Fidelity included a more than 50% allocation into equity, nearly 37% into target funds as well as mutual funds or ETFs and nearly 12% into conservative assets such as bonds, according to data the brokerage provided USA Today.

Additionally, 58% of participants on Fidelity’s 401(k) platform had all of their savings in a target-date funds, which aim to increase a person’s investments over a specific period of time toward a targeted goal.

O’Callaghan encourages investors to dig deeper than just stocks and bonds. Consider the areas you’re investing in: your small cap-versus large-cap exposure. Also, weigh how much money you want to put into U.S. assets versus international assets and into so-called emerging markets, locating in nations whose economies are developing becoming more engaged with global markets

The more diversified your portfolio, the better you’ll be shielded from market swings, she said.

More on Ukraine

• Resource fight:Russia may retaliate against Europe by halting natural gas exports

• Russian people: How sanctions will impact ordinary Russians

• Boomerang: Could sanctions against Russia blow back on Americans?

This article originally appeared on USA TODAY: Stocks swing as Ukraine war worsens. How should you manage your 401K)?

Source link