Russia’s decision to invade Ukraine has caused a lot of uncertainty for investors. First and foremost, the main concern is the safety of the Ukrainian people and their sovereignty. However, there are side effects from the invasion that are being felt outside of Russia and Ukraine that have investors concerned. So, what does the Russian invasion mean for investors? What are some things investors can do to help alleviate the impact of the side effects on their personal financial situation? Below you will find three of the main investor concerns and how they can help counteract the impact.
Inflation – While inflationary pressure has been building over the past several months (due to a higher demand for goods and supply chain disruptions caused by the COVID-19 pandemic) we now have a new dynamic to deal with – Russia’s invasion of Ukraine. Many investors know that Russia’s main export is oil, but not everyone knows that it does not end there. Russia also supplies the world with other natural resources, including wheat, lumber, and metals (aluminum, palladium, nickel, and titanium). These natural resources are needed to drive our cars, heat our homes, and build new homes. In addition, metals are used in everything from automobiles to cell phones, to electric car batteries, to aerospace products. Russia has not yet decided to cut off the West from oil delivery or other natural resources. I find it hard to believe that Russia would move in this direction (as the Russian economy would have a very difficult time insulating that shock), but we cannot put anything past Vladimir Putin. Given the uncertainty of the invasion and Putin’s response to the West’s economic sanctions, the prices of these natural resources have increased over the past few weeks. While the US and its allies have committed to releasing 60 million barrels of oil from the Strategic Oil Reserve, this may not alleviate all of the pricing pressure. Therefore, it is safe to assume that prices will remain at an elevated level for the foreseeable future.
So, how can you best prepare yourself for higher inflation? First, you need to understand where your money is going. That is why we recommend that you track your expenses to determine what areas of your spending are more vulnerable to an increase in prices (e.g. heat, gasoline, electric, groceries). Once you understand your spending habits, review your budget. If higher prices at the pump or at the grocery store are causing strain on your budget, then you may need to adjust your spending in other areas. Typically, the first line item to look at is your discretionary expenses (or non-essential expenses). This can include dining out, entertainment trips to Starbucks, travel, etc. If you are feeling the pinch from higher prices then perhaps you can skip a night out, make fewer trips to Starbucks, or perhaps put the new TV purchase on hold for a few months.
Higher Interest Rates – The US Federal Reserve has two primary objectives: to maintain high employment and maintain stable prices. In response to the strong economic recovery coming out of the COVID-19 pandemic and growing inflationary pressure, the US Federal Reserve has decided to pull back on economic stimulus. To that end, the US Federal Reserve will most likely increase short-term interest rates. In fact, Federal Reserve Chairman Jerome Powell indicated that he supports an increase of .25% in interest rates in March. While some investors may welcome higher interest rates and a higher rate of return on their savings, it is not all good news. Higher interest rates can lead to a slowdown in economic growth and thus lower stock returns. In addition, higher interest rates can have a negative impact on the housing market and those who carry variable interest rate debt.
How best can you prepare for higher interest rates? If you are someone who carries credit card debt or if you have a variable interest rate loan, now is a great time to take action. As interest rates increase, the rate on variable interest rate debt will increase as well, leading to higher monthly payments. Paying off your credit card debt will not only help reduce the amount of interest you pay, but it will also free up money that you can put towards building an emergency fund or saving for retirement. If you have another type of variable rate debt, now would be a good time to look into refinancing the loan into a fixed-rate loan. Interest rates today are still historically low, so you may be able to find a good deal on a fixed-rate loan.
Stock Market Volatility – One thing I can say with certainty is that the stock market does not like uncertainty. Unfortunately, today there is no shortage of uncertainty. We do not know what the outcome of the Russia-Ukraine conflict will be; we do not know if Russia will try to move into NATO countries, we do not know if inflationary pressures will ease over the next few months, and we do not know how high-interest rates will go. Therefore, investors need to brace themselves for a period of higher stock market fluctuation. During times of uncertainty, the stock market is more sensitive to breaking news headlines. Any particular headline can cause the market to swing dramatically in any direction.
It is times like these that remind us of the importance of a well-diversified portfolio. In addition, you want to make sure that you are rebalancing your portfolio at least once a year to ensure your allocation is aligned with your risk tolerance. Turn off the financial news and remain disciplined. The stock market could be down 2.5% one day and up 3.0% the next day. Watching the financial news could cause an investor to panic, which can lead them into making a bad financial decision. Remember, investing is a long-term strategy. The markets are going to experience periods of above-average returns and periods of below-average returns. The economy is going to experience periods of economic expansion and periods of recession. But we know that the market heads higher over time. As an investor, you never want to take a short-term view of a long-term investment.