If you’re a regular 401(k) saver under the age of about 50, or you’re someone aggressively chasing high growth, the Ukraine crisis may not mean much for your portfolio. You’re looking out decades into the future.
But if you’re an older investor that’s probably not the case. Those over 50 face a triple whammy, especially in volatile markets like these.
First, we’ll have far less time to recover from any mistakes or losses. Even if you’re not yet in retirement, you may be expecting to retire within a decade or so.
Second, we’re now investing vastly bigger amounts than we were when we were young, when we were just starting out — so missteps will end up costing us much more.
And, third, even those of us who aren’t yet retired have to err on the side of caution because we might need our money even earlier than we had hoped. Anyone laid off over 50 is going to find it much, much harder to get rehired, let alone in a skilled job.
With that in mind, here are five things that older and more cautious investors need to know following Russia’s shocking assault on the entire country of Ukraine.
1. Yes, inflation may be higher for longer
Everyone needs to adjust their budgets and their expectations for the risk that consumer prices will rise more than previously expected. Among the many issues is that Russia (and the Ukraine) are major exporters of oil, natural gas, agricultural products and many other minerals and raw materials. And this dramatic escalation of the conflict makes it much harder to find a peaceful way out. After all, if today it’s Ukraine, what about tomorrow? Georgia? Kazakhstan? Lithuania? All this raises the risks of higher sanctions and embargoes for longer.
The broad index of commodities- measuring the price of raw materials from oil to copper to wheat — just leapt another 4% Thursday, following news of the war’s dramatic escalation. It was already up 40% from a year ago. Markets are predicting higher prices for oil and gasoline, wheat, aluminum and many other raw materials.
“Inflation is here,” says Dick Pfister, CEO of Alphacore Wealth Advisory in San Diego. “It’s quite obviously not transitory. It’s here to stay.”
“What we think is happening is the start of an era of inflation,” says Michael Wagner, co-founder of Omnia Family Wealth, a multifamily office in Florida. He worries that the era of low inflation and tumbling interest rates—an era that began in the early 1980s—could finally be over. Inflationary cycles, he warns, can last decades. “We really haven’t seen anything like this in 30 or 40 years,” he says.
2. BUT… there is so far no sign of 1970s inflation
Yet all the inflation talk needs to be taken in context. We are not, yet, seeing any serious financial indications that major, 1970s-style double-digit inflation is coming soon—or at all. And that’s not me talking, it’s the financial markets. The bond market’s prediction of inflation over the next five years has jumped overnight from 2.9% to 3.1%, and that’s almost the highest such prediction this millennium, but it’s still less than half the current inflation rate. Presidents in the 1970s—Richard Nixon, Gerald Ford and Jimmy Carter—would have fallen to their knees on the Oval Office carpet and wept tears of joy at the idea that inflation would be just 3% a year for five years.
Meanwhile the futures markets at the CME are not predicting spiraling energy prices. A brief spike in gasoline and oil prices Thursday morning quickly faded. Currently the markets are predicting that gasoline prices will fall this year — about 50 cents by October and nearly 70 cents by early 2023. It’s also predicting oil prices will quickly peak and then start coming back down. Is the market right? Is it wrong? Nobody really knows. But if you know something the futures market doesn’t, go sell everything, borrow every nickel you can, and place it all on massive, high-risk options bets on commodity prices. After all, if you’re right, you’ll make yourself rich. Good luck with that.
3. Rising oil prices may anyway cause a recession more than 1970s inflation
Albert Edwards, the chief global strategist at SG Securities in London, tells me via email that in his view a surge in oil prices is more likely to cause a recession, and deflation, than it is to cause inflation. Naturally (see above), he may be wrong. But he’s been successfully outsmarting Wall Street on deflation and inflation for several decades. And the market seems to be agreeing with him. Interest rate expectations have tumbled in response to the outbreak of war, as the markets brace themselves for a slowing economy.
If you have to spend another $50 a week refilling your car, you can’t just conjure that money out of thin air. You have to take it from somewhere else in your budget. And if you can’t, you can’t spend the money. Rising energy and commodity costs would drive up prices across the economy, but that in turn would inevitably hurt sales. Fewer miles driven, fewer flights taken, fewer vacations, and fewer products bought. Terry Sawchuk, CEO of Sawchuk Wealth in Troy, Mich., thinks a recession is increasingly likely. He notes that forward-looking economic indicators, such as industrial measures like sales of petrochemicals, have been falling for months.
4. Don’t panic
It is never, ever, a good idea to panic and make big portfolio changes in response to a crisis. If your portfolio is such that you want to make changes to it when Russia invades Ukraine, you have the wrong portfolio.
Nobody knows what is going to happen next anyway. Thursday morning’s panic gave way to an afternoon rebound. Conversations with money managers produced the inevitable diversity of opinions, especially when it comes to the stock market. Sawchuk (who argues “buy and hold is a terrible strategy”) thinks there may be as much as 30% downside to the market from here. Given how far stocks had risen in recent years, and current valuations, this sort of talk isn’t crazy. Quite the reverse: By some long-term measures U.S. stocks are at nosebleed valuation levels and could fall much further than that.
But nobody really knows. And the hot money had already flooded out of stocks before this. The latest survey by the American Association of Individual Investors shows that sentiment was already more bearish on the stock market than it was in March, 2020, during the depths of the Covid crash. And the most recent BofA Securities survey of global money managers showed that earlier this month they were already holding more than 5% of their portfolios in cash and short-term bills (the highest levels since the spring of 2020). All this suggests that the next move in the stock market might just as well be a relief rally up, rather than a further tumble downwards. “Everybody is bearish,” says Joachim Klement, chief strategist at investment company Liberum. “This is the typical panic sell off before a bounce.”
Meanwhile safe havens like bonds
are up, but don’t chase yesterday’s move tomorrow. “You gotta buy fire insurance before the fire, not after the fire,” says Alphacore’s Pfister.
If you had too much risk in your portfolio last week you almost certainly have too much today, and vice versa.
5. Plan, don’t chase
This crisis highlights risks as well as opportunities that all investors should be thinking about.
Traditionally, the standard “benchmark” moderate-risk investment portfolio consisted of 60% stocks and 40% bonds. And older investors were generally advised simply to hold fewer stocks and hold more bonds, especially high quality U.S. Treasurys, investment-grade corporates, and tax-free municipals.
But that advice may be bang out of date. “The days of 5% munis are long gone,” says Michael Wagner. 50 years of tumbling interest rates have left bonds across the board with derisory yields. It’s not simply unlikely that bonds today could generate the same returns as in the past: It is mathematically impossible. With the best will in the world, no one can squeeze a 5% annual return out of a bond with a 2% yield.
Investors, including older investors, need to think about a third leg to the stool, of so-called alternative or real assets, many advisers argue. This can include more complex and higher-fee products, including funds that act like hedge funds, betting on some stocks to go up and others to go down. (Your correspondent, who has written about hedge funds for decades, is underwhelmed by this idea.) But so-called “alternatives” can also include simpler, more transparent and lower-fee products that can add value. The most obvious are funds that invest in gold and silver, in broader commodities including oil, metals and other raw materials, in real estate, and in infrastructure.
“We love (gold) because it’s so uncorrelated with other assets,” says Wagner, who recommends up to about 5% of client funds in the metal. He also likes broader commodity funds that invest in a broad basket of commodities through the futures market (even low-cost Vanguard has one, the Vanguard Commodity Strategy Fund Admiral Shares
though the minimum investment is $50,000).
Klement recommends real estate, infrastructure, and some gold, though no more than 5% to 10%. Ruffer & Co., in London, a conservative portfolio manager, holds energy stocks, gold and inflation-protected bonds as part of its most cautious portfolios. Alaska’s state investment fund allocates 10% of its money to real estate and 10% to inflation-protected TIPS. Some research argues for including real estate, commodities and high-yield or “junk” bonds to the usual stock and bonds.
For what it is worth—and it may not be much—your correspondent owns natural resource stocks, real-estate stocks and infrastructure stocks in his retirement portfolio.
But anyone making the move now should be thinking longer-term, not chasing yesterday’s news. Commodities have just jumped in price but they are super volatile and can come tumbling back down again very fast, advisers point out. This should be a “strategic allocation” for several years, says Pfister. “You need to hold it for a full market cycle,” he says.