As the Biden Administration announced harsh economic sanctions on Russia for its invasion of Ukraine on Thursday, reverberations are being felt by the U.S. economy. One of the most immediate effects has been in the stock market.
Benchmark stock indexes have fallen, with the Dow Jones Industrial Average down 3.17%, the S&P 500 down 2.09% and the NASDAQ Composite index down 1.77% in the last five days. In a volatile day of trading, stock indexes rose in the U.S. on Thursday after steep declines earlier in the day.
While the geopolitical unrest is alarming for many reasons, the stock market swings are not something to panic about. Real-world events can make stock prices more volatile in the short-term, but in the long run they have less impact on your investments.
That’s because the stock market is remarkably buoyant. The average annualized return of the S&P 500 since 1926 has been 10.49%. This is a much higher rate of return than bonds, which have historical returns of 5 to 6% over the same period of time.
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An example of this buoyancy is recent: The pandemic-related stock market crash of 2020 had the largest one-day loss in Dow Jones history, but the market quickly recovered by April of 2020.
“Unfortunately, we have more experience with geopolitical issues like you see with Ukraine,” says Michael Wagner, co-founder of the investment firm Omnia Family Wealth, pointing to the Iraq War and when Russia annexed Crimea.
While no one knows for sure how the stock market will play out, the longer you plan to invest, the less you should worry about short-term events, as alarming as they might be.
“Thirty years from now, are you going to be reviewing your portfolio and really thinking about how we did in February 2022?” asks Wagner.
Upsetting events can lead to irrational decisions when emotions are high, as long-term investing expert Warren Buffett explained in a 2017 letter to shareholders: “Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”
It’s also important to remember that the value of your portfolio is a number on paper, not money that’s in your pocket right now.
“They’re intentionally called unrealized gains and losses,” says Wagner. “It’s not official or real until you hit the sell button, then you’ve realized your loss, and it’s done. It just goes back to that point of having perspective.”
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