A Diversified Portfolio Can Help Weather Geopolitical Market Volatility

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It’s been a rocky start to 2022 with the NASDAQ, S&P 500, and Dow down 15%, 10%, and 8%, respectively. The most aggressive sectors of the market have been hit the hardest, with approximately 40% of the companies in the NASDAQ down 50% or more from their peak.

Bond prices have declined in general but bounced back in early March with risk-off sentiment building around the Russia-Ukraine conflict.

Geopolitical Events and Inflation

Fortunately, the economy is still expanding and the economic data look strong. However, input costs such as labor and energy have been rising.

The country is close to full employment, and with the current geopolitical events in Eastern Europe, crude oil has risen to over $100 per barrel. Many other commodities have similarly been disrupted due to sanctions against Russia.

Inflation has become a concern and the Federal Reserve is prepared to make its first interest rate hike at the March 15–16 meeting, likely a 25-basis point move.

The recent market volatility isn’t much of a surprise given the headwinds of a tightening cycle by the Fed concurrent with significant geopolitical disruption.

Volatility Is Expected

The market is a forward-looking discounting mechanism so much of this news is already priced in. Volatility in the markets can be unnerving, but history shows that investors who stay the course with a diversified portfolio and long-term plan have better chances of meeting their goals.

Investors who try to time the market around specific events like Fed tightening, geopolitical unrest, or even a global pandemic, could underperform.

Manage Risk by Diversifying

A strong strategy to achieve long-term success is to remain in the market with an asset allocation that’s appropriate for your specific risk tolerance, objectives, and time horizon.

A long-term plan with a diversified portfolio consisting of equities in both the US and abroad, with a mix of size and style, which includes lower volatility strategies like bonds, hedged equity, and defensive sectors like utilities, can cushion the inevitable bear markets in the long-term.

Drawdowns Expected

A review of the S&P 500 over the last 42 years shows that intra-year drawdowns can be significant. However, despite average intra-year drops of 14% over that period, annual returns were positive 32 of 42 years. Historically, it pays to be diversified and stay the course.

Some of the strongest returns investors sometimes see in their portfolios occur right after a significant decline, when the environment feels most scary. Missing just a few of these days can significantly impact long-term performance. 

For example, seven of the best 10 days of the S&P 500 between January 2001 and December 31, 2020, fell within two weeks of the 10 worst days. A fully invested portfolio over that time frame would have returned +7.47%, while missing just 60 of the best days would have resulted in a negative 6.81% return.

Market downturns can be unsettling, but they are part of the investing process. While risks always remain, macroeconomic fundamentals remain strong for the long term. It’s important to remember that a well-executed and diversified long-term financial plan can overcome bouts of volatility.

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For personalized insight or if you have questions about how changing markets could impact you, please reach out to your Moss Adams advisor.

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