The situation in Ukraine remains ugly.
Pro-Russian forces aren’t satisfied with Crimea. There are pro-Russian uprisings in various parts of eastern Ukraine. There’s talk of ‘civil war’.
Meanwhile, Russia is threatening to take the US to the World Trade Organisation over sanctions. And Europe is finding it difficult to agree on sanctions of its own, as companies dependent on Russian money lobby against such a move, reports the FT.
Yet, markets are barely ruffled. Should you get out now while the going is still good?
A blood-curdling worst-case scenario
Ambrose Evans-Pritchard has a somewhat blood-curdling piece in The Telegraph about all the terrible things that could happen if financial sanctions against Russia escalate.
We’re talking full-blown cyberwar and trade shutdowns. Hackers derailing trains filled with toxic chemicals is just one of the many highlights. You can read the whole thing – he’s always an entertaining writer – but the short summary for investors is that: “We would be living in a different world, and Wall Street’s S&P 500 would not be trading anywhere near 1,850.”
The problem is, none of us knows what will happen.
If you asked me to make a prediction, I suspect that Ukraine will end up being one of those stories – not unlike the Arab Spring – that heralds an era of turmoil and misery for the people directly involved. But beyond Ukraine itself, the impact will be limited.
There’ll be a few heart-stopping moments for markets during that time, but nothing more than that. The ‘taper’ and tighter monetary policy in the US is probably still a much bigger risk.
But that’s just my best guess. Despite the Polish surname, I’m no expert on Eastern European politics.
But that doesn’t matter.
You see, the real threat from Ukraine and big news stories like it, is that they make you do stupid things with your money. If Evans-Pritchard is right, then you should sell just about everything except gold and oil, then wait for a colossal buying opportunity in everything else further down the line.
If he’s wrong, you’ve just derailed your whole investment strategy and incurred a load of costs for nothing. But even if he is right, what time scale are we looking at? And when do you buy back in?
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Start by knowing what you can control – and what you cannot
So what can you do?
The truth is, I suspect that most investors – in fact, make that most people – would be both psychologically healthier and financially better off if they watched a lot less news and read a lot more books.
The problem with the news is that it creates a false sense of urgency. You immediately feel that you have to respond in some way, even to events that do not directly affect you (and that you in turn, cannot have any impact on).
This constant sense of fight or flight is emotionally and intellectually toxic. It makes you stupid and reactive.
It takes a while to learn this, but investing is not about predicting the future. That’s a fool’s game, no better than punting the lot on black or red at the casino.
There are only two things you can control in investing: the price you pay for an investment, and the cost of investing.
When it comes to the price you pay – buy assets when they are cheap. They tend to get more expensive. Sell them when they’re expensive. They tend to get cheap.
(The best way to value any given asset is of course, a matter of debate. But there are plenty of reliable indicators that have proved themselves reasonably reliable over the long run – for stock markets, our favourite is the Cape, for example.)
For example, the crisis in Ukraine might prove a good buying opportunity for Russian stocks. But that decision shouldn’t be based on potential outcomes. It should be based on the fact that – relative to history – the Russian market looks cheap.
As for costs – the point is to hand over as little as possible of your pot to the guys in the middle: the brokers, the fund managers, the sales people. You want your money to work hard for you – not to get consumed as part of the City’s wage bill.
So always consider the cheapest option first. Sometimes an active fund manager will be the right choice. But most of the time, a cheap passive tracker will do the job just as well – if not better – and cost you less.
And how do you cope with the things you can’t control? By not betting your pot on one outcome. You don’t have all your money in stocks, or bonds, or gold. Instead, you diversify. That way, your portfolio should be able to withstand all the uncertainties that life will throw at it over the decades to come.
You don’t have to have hundreds of different holdings. Five broad asset classes (stocks, bonds, property, gold and cash) will cover the bases nicely.
So that’s all you need to know. Don’t put all your eggs in one basket. Don’t pay too much. And buy stuff when it’s cheap.
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