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I’d be wrong to write about the relatively trivial topics of investments, economics, and financial planning without first acknowledging the tragic set of circumstances playing out in Ukraine.  As is the case with any war, it’s incredibly sad to see the loss of life and destruction of lives that is taking place.  There is no way to know how things will play out going forward, but hopefully for everyone involved a cease fire can be reached and the damage and loss of life minimized.  If you are so inclined to help the people of Ukraine, I found this to be a good resource.

If you’re a TAAG client, or read this blog on a regular basis, you have almost certainly heard us talk about maintaining a globally diversified portfolio.  We strive to avoid a “home bias” which is an overweight of portfolio holdings to the country we live in.  Instead, we target an equity allocation that comes closer to mimicking the global equity market cap.  To help illustrate this, the chart below shows a world map by equity market cap.  You’ll notice that the US market made up just 57% of the global equity allocation as of 12.31.2020.  Russia, by comparison, represented less than 1% of global market cap and is represented by the unlabeled small grey box in the upper right corner of the chart.  That, of course, was before the current events and economic sanctions that have crippled the Russian economy.  As a result of those sanctions, Russian stock markets are currently trading over 65% off their recent high set in October last year.

This is all to say that the exposure to Russian equities in client portfolios is extremely low.  The emerging markets funds we use in portfolios do have some exposure to Russian companies ranging from 0.21% to 1.31% of the fund as of 1.31.2022.  It’s worth noting that the Russian companies that are held in these funds are not accessed directly through the Russian stock markets.  They are purchased primarily on the London Stock Exchange and the New York Stock Exchange through depository receipts.  Due to recent events, the Dimensional Fund Advisors Investment Committee voted on March 1, 2022, to remove Russia from its list of approved markets.  They consider a variety of factors when evaluating a market’s eligibility for investment, which include, among others: government regulations, restrictions on foreign investors in that market, and market liquidity.

In closing, this latest crisis provides a reminder that markets do not always go up.  The war in Ukraine and inflationary concerns are the latest headlines driving the markets.  However, there are always going to be periods of decline, sometimes sharp and painful declines, for very tough reasons.  While we can’t predict the timing, the reason, or the scope of a market decline we do plan for market conditions like we have seen to start 2022.  We consider periods of negative returns to be the cost of admission, to realize the long-term benefits of owning stocks.

Diversification is the best tool for managing through periods of market decline and higher uncertainty.  When some asset classes are in decline, others fair better.  For our retired clients that are withdrawing from their portfolios, we maintain several years’ worth of cash and bonds to fund their living expenses.  This prevents us from being forced to sell stocks in a down market.  In all portfolios we continue to look for opportunities to rebalance among asset classes.  Our disciplined approach allows us to systematically sell high and buy low as markets dictate.  We firmly believe that if we stay the course and stick to our philosophy then our clients will be put in a position to realize their financial goals.