Geopolitical developments can drive anxiety in the financial markets. The buildup of tension between Russia and Ukraine is a textbook example of this. Investors around the world are watching the situation closely because the ramifications are significant for stocks, bonds, commodities, and other asset types.
For long-term investing, it is important to keep a development or piece of news in context. A question to ask oneself is, “Is the seeming magnitude of this news event proportionate to what’s likely to happen to my portfolio (or the market overall)?” News, especially unpleasant news, can feel heavy in the moment, making it easy to overestimate the “effect” in a “cause-and-effect.”
With regards to Russia tensions, consider this: Russia has very small exposure in the global stock indexes, making up only 3.2% of the MSCI Emerging Markets Index and just 0.4% of the global stock market measured by the MSCI AC World Index. Ukraine has no exposure in either index.
Jeff Kleintop of Charles Schwab writes in his “Guide to Geopolitical Risk: Russia-Ukraine” on January 31, 2022, “Previous incidents involving Russia had little impact to the markets. Most similarly, Russia’s invasion and subsequent annexation of Crimea from Ukraine in 2014 saw the S&P 500 and other developed and emerging markets around the world dip less than 2% on the day it occurred and rebound at least partially during the following five days.”
We don’t dismiss the gravity of the situation. The human costs of military action are unmeasurable. However, as investors, we should be grounded when we digest news stories like these so that we are not rattled into making investment decisions that might not be in our long-term interest.