Russian Invasion of Ukraine | Brandon Averill, Justin Dyer | AWM Insights #101
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Episode Summary
Russia has invaded Ukraine and war is the talk of the global news and financial media. Financial warfare has also been waged by countries around the globe with punishing sanctions placed on Russia. What does this crisis mean for your investment strategy?
Brandon and Justin discuss what you should be thinking when it comes to unpredictable global events.
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Episode Highlights
(0:45) How does the invasion of Ukraine impact your portfolio and investment strategy?
(2:00) Long term thinking and refocusing on fundamentals applies to money but also everything else in life. Fitness, business, sports, all benefit by reframing and focusing on the basics.
(3:10) No one is immune to the pain of markets adjusting to new information. It is normal human nature to stress out when the unexpected happens.
(4:04) If markets only went up and to the right, then there would be no risk and therefore no reward.
(4:48) Risk and reward are always related. You should expect corrections and drawdowns as part of the cost of seeking higher returns.
(5:50) If everyone knew something was going to happen you wouldn’t call it a crisis.
(6:25) No two historical events are the same.
(7:40) You can’t time the market. You have to be right too many times. Getting out, waiting, then getting back in. No one in market history has proven they can reliably repeat market timing success.
(9:00) Is it worth it to try to find the next Warren Buffett? No, there’s a better way than trying to get lucky.
(9:30) Diversification is the only free lunch in investing.
(10:15) Complacent thinking and not diversifying happens all the time when markets or assets are going up.
(11:40) In times of stress, like right now, the benefits of diversification prove why you need it. US Government bonds have done their job once again in this downturn in protecting capital.
(12:51) Diversification saves you, it allows you to stay invested and not panic.
(13:40) If you have invested money in the equity markets that you need in the next year, you should be nervous. Moments like today is why financial structure matters.
(14:45) Do I do this on my own or with an advisor?
(15:03) If you want someone to help remove the emotion and has developed a skill set and builds financial structure to weather these kinds of storms, then an advisor will be worth their weight in gold to you.
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+ Read the Transcript
Brandon Averill (00:06): Well, Justin, we're back. And we're going to take a little break from our little series here on the fundamentals. We're going to get back to the fundamentals in this conversation. I can almost guarantee that.
Justin Dyer (00:18): We'll touch on fundamentals in this one though, too. I mean-
Brandon Averill (00:21): And I probably shouldn't say guarantee on a financial podcast, but that is... We'll definitely get back into that, but we're going to take a special break today. This was a requested topic, not surprisingly, but we keep getting the question. How do the unfortunate recent events that are happening in Ukraine and with Russia, how do they impact my portfolio? Should I be thinking about making some changes? What's going on? I think most people actually know the answer to this question, but there's still some comfort in revisiting this topic. So, let's jump right in, Justin, I would love to, yeah, just touch on the fundamentals here. How are we thinking about it when something like this happens?
Justin Dyer (01:08): Yeah. And let me just address too, right at the outset, what you said. I think a lot of people inherently know what the answer to this question is. If they don't, hopefully this is really helpful, but we're going to go back to core principles, to the fundamentals, kind of like I was alluding to in that comment. Obviously, with respect in the context of what's going on in the existing environment and current market environment, but it's important to do that. We always go back to core principles and fundamentals a lot here and say, hey, it goes back to a long term focus and things like that. And I'd say that tongue in cheek, but it's important to underscore the why, and it's not unique to what we do. It's not unique to investing.
Justin Dyer (01:52): It's not unique to financial planning, whatever you want to label the broad subject area that we cover. Money, let's call it. It applies to your diet. It applies to working out. It applies to the corporate world, some of the best executives around go back each and every quarter, or annually, whatever it may be, to kind of the fundamental principles of what it is, what it means to be running a business. They have maybe their executive coach as well. And it's just kind of a trait of human nature. So it's healthy to ask questions like this, but it's also okay as well if the answer is the same. Now, and it's important to continue to ask the questions and make sure the answer is the same, because there are periods of time where maybe the answer is different, few and between, that's for sure. But let me just underscore that and then can kind of jump into to the topic and the fundamentals.
Brandon Averill (02:52): And I think that's maybe even a good place to start is with one of the ultimate fundamentals, I think, the emotion takes over when you see markets correct to an event like what's happening in Ukraine, but that's a healthy part of the market. It's tough to deal with. Let's acknowledge that. Nobody's immune from watching a portfolio adjust to new information. But what we know is that if markets didn't adjust to that new information, that's when we actually really have a problem. And so I think the world, the markets, et cetera, as this situation continues to develop, markets are going to fluctuate with new information that's coming about. And I think that's also right what makes it so hard to predict the short term, and really nobody should be predicting the short term because we don't know what's going to happen. We don't know what's going to happen largely in the future, but we certainly don't know how things are going to unfold in the really short term.
Justin Dyer (03:50): Yeah. And it's good to go back to this concept of risk, too. We always say risk and return are related. Well, that is exactly related to what you're saying, where if markets only went up into the right, as recent history has kind of led some people to believe really since the COVID correction and the recovery out of that, whether it be crypto or meme stocks or the market in general, it did breed a little bit of complacency. Oh, hey, investing is easy, and crypto's going to solve all these incredible problems. And I'm saying that also tongue in cheek, just to say I know a lot of people probably should at least understand our viewpoint on crypto is an interesting technology and whatnot, but there was a little bit of hype going on in speculation amongst other parts of the market, but risk and return are related. A correction, whatever the driver of what that correction is, is a healthy part of the market.
Justin Dyer (04:57): You shouldn't expect higher rates of return than holding safe investments, like let's say cash or US government bonds. You shouldn't expect a higher rate of return than those investment vehicles if risk were not a part of the equation. And geopolitical risk is a very real part of the equation. The other important thing, and then I'll pause and let Brandon, you run with it, too, is no two historical events are the same. And almost by definition, and this really, I think, is an often very overlooked fact when it comes to people who try and time the market or talk about investing and hey, where should I invest now? Or is the market going to crash this year?
Justin Dyer (05:42): Kind of by definition, a market crash is a crisis. And by definition, a crisis is an unforeseen event. You wouldn't call something that everybody got right a crisis. If everyone knew it was happening, it wouldn't be a crisis. And what's going on in Ukraine is potentially, or is kind of in line with that. No two events are the same. Things come out of left field. Maybe we had our head in the sand or maybe it was truly overnight something came up, but that's part of it. That is part of it. And you just kind of have to accept that.
Brandon Averill (06:21): I think that's a great point. I love that comment. No two historical events are the same, but what we can, right, that it rhymes is the saying goes right. So when we look at the past and we start to look what happened, I think the picture or becomes clearer. There's a great chart put out by dimensional fund advisors that goes from 1970 to roughly today, and it shows the growth of the kind of world stock market but then it labels all the events. And I think what's fascinating to me when I look at something like that, we'll put a copy of this in the show notes, but even if I go to the year 2000, and right before the dot com bust, if I were to put all my money into the market at that point, 20 years later, when you scan back out, it's grown pretty impressively.
Brandon Averill (07:14): And that would've been the worst day possible probably to throw your money into the market. You could say the same about 2008. The mortgage crisis that hit us here in the US. And so I think trying to time these things, when we start to look at those, I mean, there's study after study, that shows unfortunately we can't time the markets. It just doesn't play out that way. There's too many decisions you have to get right. You have to get right when to get in. You have to get right when to get out. You have to get right when to get back in.
Brandon Averill (07:49): And what we know is that these studies just continually show, what you put at risk is missing those best days in the market. And those come pretty quickly after some bad days, typically. And so it's just almost impossible, I'd even argue impossible, to time all that up on a consistent basis. People get lucky all the time. We hear these stories that people get lucky with individual stock picking or timing this or that, but nobody has been able to consistently kind of get lucky and do that time in and time out.
Justin Dyer (08:24): An incredibly important component to add to that as well is knowing ahead of time who's going to get lucky or who's going to be good. I mean, let's give somebody the benefit of the doubt. I mean, there are a very small number of investors. Did anyone know Warren Buffet was going to be Warren Buffet early on? Warren Buffet has largely performed in line with the markets recently, and part of that maybe the size of his company, but he was a great investor early on in his career. How many people... And is it worth actually even going down that route to say, hey, let's find the next Warren Buffet. No, because there's actually a higher probability game you can play when it comes to investing. And then kind of trying to pivot back to the present day a little bit, and talking about the markets under a little bit of stress here, I also want to definitely bring into the conversation, hey, there is a free lunch, so to speak, when it comes to investing.
Justin Dyer (09:26): And that really at the end of the day is diversification. Diversification is the tried and true tenet of investing. Over the last two years, let's say pre what's going on currently, in pre 2020 almost, as the markets have had a rockier start to the year even before what's going on in Ukraine. The 2021, or excuse me, 2020, 2021, a lot of the kind of COVID inflated market movement makes you question diversification. Hey, no, you actually outperform in the top five stocks, or you should put a substantial amount of your money in crypto, because it's going to double or triple, or whatever the case may be.
Justin Dyer (10:15): And there's a complacency that potentially sets in and it makes sense. I mean, we only can look back and see how things have performed and say, oh wow, I wish I would've done that. And so I don't want to hold 13,000 different stocks and have global diversification, but you do when it matters. Right now is a small example of that, markets haven't corrected substantially, unless your portfolio is all in Russian stocks and where we take that, I guess, question is how we should be diversified is, okay, we should be globally diversified. Yeah, at times, we're going to hold markets that are not performing as well as say the US market has over the last few years. But guess what? There was a 10 year period in the first decade of this century where the US market was flat, for a 10 year period, US market was flat, largely because of the great financial crisis, but we didn't know that ahead of time.
Justin Dyer (11:25): Now fast forward. US market has done incredibly well. US and emerging, not so much. They've still performed positively, but haven't performed as well. And you just have to accept that because of the power that practice actually produces in times of stress. And that is when it matters most. It is so much easier, going back to the behavioral finance comment, it is so much easier to just watch your portfolio rise in value, kind of year over year, and see good returns and be comfortable with that. Even if you're, oh yeah, I get maybe valuations are higher, or the economy is flooded with liquidity, whatever the case may be.
Justin Dyer (12:08): It's far easier to convince yourself to say, oh yeah, that makes sense. I'm good with that. That's great. Obviously, we're kind of in this to earn money on our money, but markets will correct. It is a healthy function. It has to happen for, again, that higher expected return. And when that happens, the emotional reaction is so much different than it is on the flip side. We don't have a symmetrical reaction to gains versus losses and having diversification in place for that crisis event that is kind of, again, by definition, unpredictable, it saves you. It allows you to stay invested, hopefully. It allows you to continue to ride out of it and have that long term compounding effect on your wealth and multi-generational wealth as well. So, sorry, went on a little bit of a rant there, but...
Brandon Averill (13:05): No, I think it was a lot of great points there, and I think, as you were talking, it reminded me of also the reminder that we are talking to long-term investors here, people that have taken the time and the work with their advisors to put a proper financial structure in place. Unfortunately, there's a lot of people that, you know what, if you have invested money that you need over the next year in the equity markets, yeah, I'd be pretty panicked right now, because you're exposing yourself to complete uncertainty. And so kind of coming back to the last fundamental is that if you haven't taken the time to identify your priorities, the advisors you work with haven't taken those and built a custom individualized portfolio for you, then, yeah, I'd be nervous. I'd be pretty nervous if you're in one of those situations where your advisor just came in and did the little I'm going to click and get your risk tolerance, and I'm going to throw you in an 80/20 portfolio, I'd probably be a little nervous as well.
Brandon Averill (14:12): So I think at the end of the day, we're talking to long term investors, because we know that is what provides the greatest outcomes. And so I guess I would encourage everybody to think through that. This all comes back to those fundamentals, risk and return being related. The most important part of your investment portfolio is the financial structure that you put into place. And then I would say the other part of this is we talked a couple episodes ago about do I do this alone, or do I do it with an advisor?
Brandon Averill (14:48): This is an emotional time. We're in a point in the world where some very negative stuff's happening geopolitically, and that's tough to deal with for most people. And if you struggle with those emotions, you probably want to lean on somebody that has a developed skill set, has gone through the training to remove that emotion from the process. And if you can find that in an advisor, a lot of times that just makes them absolutely worth their weight in gold. So, we hope this has been helpful. Hopefully during this time of uncertainty, you have a little bit better idea of how markets work, that this is healthy, that markets do retreat during tough times like this. When you scan out, there will be better days ahead, unless capitalism completely folds, we're going to see our money grow over time.
Brandon Averill (15:41): And that's really what everybody here is in the game for. So as we close out, just a reminder again, shoot me a text. We'd love to keep in touch with you. We're going to be giving away some stuff via this text message as well. So the phone number for, for the text is 602-704-5574. If you shoot over the word insights or that little light bulb emoji, we'll get some cool stuff out to you. We're going to start giving out some swag on that phone number as well. So we look forward to hearing from you. I'll say it again one more time, but 602-704-5574. We look forward to staying in touch with you, and until next time own your wealth, make an impact, and always be a pro.