We tend to think that markets are super-duper liquid. That at any point we can get our money back. Come day or night. And they usually are, for the most part. Except when they’re not. Like now. Last week, Moscow’s stock market shut down. Meanwhile, Russian shares that were listed on other exchanges (like the LSE and NYSE) collapsed. ETFs that focus on Russian stocks are down ~90% (or more). But for the most part, they’re frozen solid. And this is something we, as investors, have mostly forgotten about. We forget that markets can dry up, for real, like in ’08, or they can even die. Like we’re seeing right now.
The NYSE Arca exchange stopped the trading of iShares MSCI Russia, Franklin FTSE Russia as well as the Direxion Daily Russia Bull 2X Shares. Direxion said that they’ll liquidate on 18 March while trading of the other two Russian available ETFs (VanEck Russia and VanEck Russia Small-Cap) could also be forced to shut down and suspend trading. Investors are stuck. They can’t sell because they can’t trade. It’s almost like these securities just don’t exist anymore!
And the securities that they were able to sell (until they couldn’t) had a full-on selling spree. Gazprom PJSC (Russian energy giant) closed at $1.10 on 3rd March, down from $8.97 on 16 Feb. YOWCH. Sberbank Russia PJSC closed in the US at 52 cents on that same day, down from $14.76. These guys are trading at p/e ratios that are below 1!
Nothing Lasts Forever
Back in 1911, Russia was the fifth-largest investing hub in the world (I know, hard to believe now) and they accounted for 5% of the global market for stocks and bonds. More than 200 Russian companies were listed on the St Petersburg Stock Exchange in 1914. It was obviously closed when WWI broke out but it opened later in 1917 only to be shut down yet again when the Bolsheviks came along and overthrew the Czar. And do you know how long it took for trading to resume? 75 years!! I doubt anyone’ll be waiting around.
But back in ’08, the Fed (and a whole host of other central banks) quickly stepped in to prop up the markets. To prevent widespread collapse. They flooded the market with liquidity (this was the start of all the money-printing stuff) and ushered in an era of uber-cheap interest rates. But this isn’t always the case. And they aren’t always going to come to our rescue, much as we’d like them to. The collapse of Russian stocks is, like many other things (ahem, gas prices that are up 40% today and oil prices which btw hit $130 a barrel!) casualties of war. This is the risk of investing. Sure, some risks (cough, cough a war) don’t really come into our radar but they can happen nonetheless. Anything’s possible. I think last week taught us that.
This Sneaky Bias Proved Costly
Whichever way you look at it, Russian equities are now valued at zero. Zilch. Nada. So, no matter how long you hold them, over how many decades, it’d still be zero. And I don’t think this is a risk that anyone (not even Russians) thought would become a reality. Russians had around 95% of their portfolio invested in their own stock market. And look what happened to them.
So, dear readers, don’t fall prey to ‘home bias’ – a tendency where we invest the majority of our portfolio in stocks/funds that are on our home turf. Russians did that. And they got burnt. More like their money did! Many Brits I know have a massive huge chunk of their portfolio in UK stuff. But here’s the thing, the UK did not experience any kind of bull run since 2011 unlike their American cousins. And those of us who clung to the UK without having much exposure to the Americas suffered greatly. Their portfolios did not have that stunning growth we’ve seen unfold. And I bet it felt a bit rubbish. So do yourselves (and your money) a favour and invest everywhere. Not just the familiar stuff.
Diversify Your Risk Away
Diversification means not putting all your eggs (money) in one basket (investment) for if that basket were to break (aka an investment goes belly-up like Russian stocks) then you’d be in real trouble. Being diversified means your money is spread out. Over many, many areas. It means you aren’t overly concentrated in one area or another. Since a war can break out, even now in 2022, nothing is ever quite guaranteed. What’s certain is uncertainty itself but diversification can help reduce some of the stress and anxiety associated with this ever present uncertainty. That no matter what happens, you’ll be exposed to it all from energy (what a cracking place to be in right now) to real estate to tech. Because no one knows what the future holds, let alone the next day!
Diversification is as much about reducing your overall risk as it is ensuring that you’re exposed to a wide variety of investments to give you the best chance of success. Since no one really knows what region will outperform, you want to be invested in ‘em all! Cast your net far and wide and you’ll hopefully be rewarded. But if you stick to one area, you either run the risk of not enjoying a whopper bull run (and suffering with soggy returns like UK investors have done) or worse, (like the Russians), your stock market gets shut down!
This is a harsh reminder that diversification is not just a risk-reducing thing but a wealth-protecting thing, too.
Russia’s sudden invasion shows us that we should never get complacent. That we should invest across a large number of geographies since literally anything can happen.
Diversification (lowering risk to boost returns) is the only free lunch in finance. Aka it has zero opportunity costs attached. And it’s not complicated at all. The key is to make sure that you’re invested across many different regions. Not just the one you happen to be living in. Course we’d be way more comfortable if we stuck to companies we know and love our but our money sure won’t be!
So go out there and get diversifying. It’s never too late.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 