Market Trends Trump Market Movement

When writing financial commentary on the events in Ukraine, it is crucial to note that we approach the topic not by normalizing tragedy but by considering reality. It feels like a disservice for us to be consumed by a temporary drop in investment values when others fear for their families and freedoms. However, Legacy has been tasked with the financial well-being of our clients. Regardless of the environment, that is our top priority – not to sell investment packages, not to drive new business, but to optimize the finances of those who have entrusted us to do so.  

Before diving into market movements, let us re-examine the structure of a well-executed portfolio: 

  1. If an investor has scheduled cash distributions from their portfolio for retirement expenses or any other reason, that portfolio should hold approximately three months’ worth of cash distributions. This means that market movements that last fewer than three months have little to no effect on their portfolio health.  
  2. For investors currently in retirement or planning to retire within 3-5 years, their target portfolio allocation has a sufficient fixed income portion. The purpose of this investment slice is to provide stability when equities are volatile or falling. Because of this allocation, cash needs for multiple years can be fulfilled and income generated by selling fixed-income holdings. Short-term and high-quality bond holdings are negatively correlated to equities – meaning they increase in value when equities decrease.  
  3. For equity positions, all decisions should be viewed through a risk-return lens and managed alongside the investor’s goals. Legacy’s investment funds are provided by our close partner Dimensional Fund Advisors (DFA). The company was founded by David Booth and Kenneth French and Eugene Fama – whom many have called the “Father of Modern Finance.” Based on sanctions on Russia from 2014, DFA funds have been anywhere from 60 to 95% underweight (having less exposure to) Russian assets than the benchmark. 
  4. For investors in a more aggressive investment position with high equity allocations and long-term investment horizons, the goal is to have captured substantial growth when cash flow is needed. The effect today’s volatility has on a portfolio set aside to be drawn on in 5 or 10+ years is negligible. 

The moral of the story is that exemplary portfolio structures have built-in mechanisms to guard investors’ real-life cash flow needs against pullbacks in equity markets. Legacy’s investment choices and account activity are built on these principles. The longest ever recessionary period was The Great Depression, lasting approximately five years in the early 1930’s. Legacy uses this period as a stress test when recommending target models; our portfolios are crafted to withstand such extreme events.  

Based on these measures in building portfolios to these specifications, our clients’ financial success is not significantly affected by short-term drops in the equity market. We do not know how the current Russia-Ukraine conflict will play out. What we do know is how past geopolitical conflicts, specifically war, have impacted the markets and the world economies. Using data from the S&P 500 dating back to the mid-1920s (unfortunately, proper records do not go back to WWI), we can review measurable war times and the investment environment in that time. Remember to focus on the multi-year trend rates, not the short-term movements that well-crafted portfolios are built to absorb: 

  • World War II: the investment return from 1/1/1939 to 12/31/1945 was 100.78% (10.1% annualized) 
  • The Korean War: investment return from 1/1/1950 to 12/31/1953 was 91.47% (17.6% annualized) 
  • The Vietnam War: the index returns from 1/1/1960 to 12/31/1975 was 158.5% (6.1% annualized) 

It is true that market volatility is stressful. It is not true that your long-term financial success hinges on these short-term market movements. Focusing on the long-term market trends shows that now is not the time for panic. Now is the time to be thankful that proper planning has been done on your behalf and, most importantly, to cherish time spent with loved ones and the freedoms we are able to enjoy.  

Leave a Comment

Scroll to Top