Planning, rather than reacting, gets us through volatile periods

Understandably the events of the recent days and weeks in Ukraine have caused anxiety for investors as markets have struggled with severe bouts of volatility.

Source: Medium.com

The shockwave triggered by Russia’s invasion of Ukraine spread across global financial markets Thursday with European markets experiencing heavy declines. The US market however was a mixed bag as many US listed companies are more insulated from the direct impact of the conflict. US Tech rebounded following weeks of losses.

A slight positive is that the events in Ukraine have now potentially reduced expectations for an aggressive interest rate increase by the Fed in March, although the Russian invasion may add more fuel to inflationary pressures.

As managers of your wealth, this responsibility is one that we take very seriously and appreciate that the difficulty investors face on a daily basis trying to navigate the usual economic forces that buffet markets are challenging. The impact of geopolitical risks is even more opaque, so want to reassure you that whilst we cannot say we knew this would happen, our approach to portfolio construction taking your personal circumstances and objectives into account, will always factor in the unknown to ensure we are not forced into a position to react and potentially cause long term damage to your investment portfolio.

It is important to note that while geopolitical events tend to result in a change in the world order, they have little impact on economic fundamentals. If we consider more recent events like the Cuban missile crisis or 9/11, there was an immediate reaction driven by the fear of the unknown followed by a strong recovery as economic fundamentals restore direction to the market.

The graph below illustrates those bouts of market volatility are not uncommon with the Covid pandemic the most recent to test the patience of any rational investor, but quickly followed by a recovery. While we cannot say with certainty a recovery is imminent, we have the ability to be patient through forward planning and an understanding of your personal circumstances.

Again, we must focus on the objectives of our investors, and it is our responsibility to ensure an appropriate construction that allows for periods of uncertainty, giving time for fundamentals to ultimately restore faith in risk assets. Understanding the type of shares we own on behalf of our clients, gives us some comfort that we place a strong emphasis on the quality of the business with strong free cash flow, low degrees of leverage and the ability to generate consistent growth of earnings irrespective of macro-economic events.

To best illustrate this, we were very pleased with the recent results of JDE Peets (the most recent addition being made to our clients’ portfolio) ahead on revenue and earnings, and growth is expected to accelerate in 2022 to double digits as price increases come through and out of home recovery continues.

During times like this I am reminded of a quote I believe is attributed to Jack Bogle – the founder of the Vanguard Group who is credited with creating the first index fund.

“Volatile markets aren’t the enemy, but selling without a plan is.”

No investment is risk-free sadly, and this includes cash (something we learned in the banking crisis of 2008) but more especially in an era of rising inflation. If you don’t take risk in your portfolio, you could face the biggest risk of all which is potentially falling short when you no longer have the ability to create wealth in your retirement

Kind regards

Your Baymont Wealth Team