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Black Swans and a Russian Invasion of Ukraine

Black Swans and a Russian Invasion of Ukraine

February 22, 2022
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Getting Prepared for the next Black Swan Event

A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.” - Investopedia.com

With February winding down we inch closer to March and the two-year anniversary of the COVID-19 global pandemic. This is a good time to reflect on the past two years, and while we are at it, the past 30 years. Let’s start with the past two years. Ask yourself the following question:

How did the pandemic affect you?
Where was your career prior to the pandemic? What changes have happened?
How did the pandemic influence what you want and how you lived your life?
How has the pandemic affected how you spend money and plan financially for the future?
How did your experience with COVID-19 influence how you think and feel about life and your life goals?

The Pandemic can be categorized as a “Black Swan” Event. A type of event that is very rare, and for the most part, we can fail to plan for adequate. The last major pandemic we think about from an American perspective was Polio, before that, the Spanish Flu. Hopefully we do not see another pandemic in our lifetime. The perceived or real chances of a Black Swan event happening are fairly low, and difficult to comprehend. How these events will affect us, and others is also difficult to comprehend. A few examples include

  • 1973 Arab-Israeli War, Arab members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo against the United States
    Black Monday Dow drops 25% in one day – October 1987
  • The Fall of the Soviet Union - 1991
  • Japanese Real Estate Bubble - 1992
  • Dot Com Bubble - 2000
  • September 11th, 2001
  • SARS – 2003
  • US Housing Bubble and Financial Crisis – 2007/2008 Brexit - 2016
  • COVID-19 – 2020

When it comes to executing and realizing our financial plans it is advisable to consider the reality of a Black Swan(s). This can be a humble tool and reminder that we can have an amazing plan on paper. It looks like a fortress that is invincible to challenges, changes, and failure. However, maybe there is a 3 – 30% chance a change to your plan will be required. Maybe there is a 1%-100% chance your plan will fail completely from unforeseen risks or major changes in the economy or markets, etc. It is possible we suffer from a chronic illness or take on additional financial obligations to take care of a family member or close friend.

Financial risks, life risks, geopolitical risks, inflation, death, chronic illness, war, tax increases, recessions and rates of return are outside of our immediate control.

I bring this up as Russian troops are positioned in a manner that has increased international tensions. The US government is confident that Russian troops are going to invade Ukraine or otherwise use force in some manner to influence the region and countries they border.

If the Russians attack, it could very well be our 2022 Black Swan event.

Nowhere in the past year was this on the radar as a meaningful risk to hedge against or plan around. The consequences of such a conflict could be isolated, however I think it would be wise to think of it more like a giant rock being thrown into a still pond of water. At some point the entire world will feel the ripples. The world has many international businesses, lines of trade and interconnected commitments that are of mutual benefit. This one event could cause major changes, challenges, disruptions resulting in financial, political, and social costs that are difficult to measure. Even if it doesn’t just the perceived damage and risk could have a large impact on markets.

If Russia does invade Ukraine or start a protracted “Phoney War”, we should expect markets to react. They could retract or otherwise move irrationally as some market participants will not have a basis from which to price assets or estimate the future value of assets that maybe affected by this geopolitical shift.  

Should we be scared? Should we make big financial changes in preparation for Russian invasion?

If you are invested directly in Ukraine or Russia, have family in the region I’m sure you have already taken notice. For the average American, the short answer is no. It is important to note that Russian influence in certain parts of the world is high. They have a large standing army and nuclear weapons . However the Russian economy, as measured by GDP is smaller than that of Canada or Korea by comparison. You most likely do not need to make changes. That said, consider this a great time to stress test your financial plan, investments, and expectations. Ask your financial planner or investment advisor about your international exposure in your portfolio and how events in Ukraine might be affected as it relates to your specific holdings.

Recent stock market returns are not a basis to assume future returns.

It is easy to forget we are coming off one of the strongest bull markets in history (March 2009 – March 2020). The bear market from COVID-19 and subsequent recovery was the fastest on record since the end of World War II. It is also easy to forget between 1999 – 2009 the S&P 500 generate a cumulative return of - 6%. (Yes negative 6%).

As we continue to wait and see what unfolds in Ukraine, we should be vigilant of the reality there will always be major events around the corner that will be difficult to predict, hard to plan for and could challenge or change every fiber of our financial plan. They might only happen once in a lifetime; they might have 5 times in the next 10 years. How much or little they will affect us is relatively unknown and outside of our control.

I’m not sure what Russia stands to gain long term with an invasion of the Ukraine aside from reassuring neighboring countries that Russia is a regional power that will have influence on your government, economy, policies, trading partners and attention. I also know I’m not their target audience. Given the extremely high cost of a kinetic invasion (troops on the ground) and potential occupation; I suspect we will see a lot more conflict and engagement in other areas that will grab headlines and have economic consequences.

The First Cyber War?

Troops on a battlefield thousands of miles away can make us feel like the risk of loss is far away. However, it is very possible most of the fighting in the next global or regional conflict happens online. We could see a spike in attacks or specific state sponsored attacks on computer systems on a scale we haven’t seen before or personally experienced.

If you have concerns about this or other risks to your financial plan, don’t hesitate to schedule a review or find time to connect with us for more information on how to stress your financial plan for 2022 and beyond.