How might the Russian invasion of Ukraine impact high net worth investors?

The invasion of Ukraine has come at huge human cost. The Western response centres around imposing significant economic and financial sanctions on Russia. In a globalised world, that is causing disruption worldwide.

The UK government acknowledges sanctions will come at a cost to the UK and we’ve already seen markets show some substantial moves as a result. What might the longer-term investment impact be?  

Important: The information on this website is for experienced investors. It is not advice nor a research or personal recommendation to invest. If you’re unsure, please seek advice. Investing in smaller companies is high risk and you could lose all the money you invest.


Look to the past

Global markets have weathered many crises since the world’s first “modern” stock exchange was established in Amsterdam in 1602. There are plenty of examples of markets riding out times of crisis, and while history may never repeat itself, it often rhymes. 

To get an understanding of what the current crisis could mean we’ve looked at how the Dow Jones, one of the oldest continuous stock market indices, has fared through a selection of major conflicts in the twentieth and twenty-first centuries. 

Specifically, we’ve considered: 

  • The Second World War – 1 September 1939
  • The Cuban Missile Crisis – 16 October 1962
  • The Soviet-Afghan War – 24 December 1979
  • The Gulf War – 2 August 1990
  • The September 11 attacks and War on Terror – 11 September 2001
  • The Russo-Georgian War – 1 August 2008

The table below shows how the Dow Jones performed over five trading days, one year, five years and 10 years after the outbreak of each conflict.

Performance of the Dow Jones following the outbreak of each conflict

Second World War Cuban Missile Crisis Soviet-Afghan War Gulf War September 11 attacks Russo-Georgian War
5 trading days -1% -4% 0% -6% -7% 0%
1 year -12% 27% 15% 3% -13% -18%
5 years -4% 54% 44% 62% 19% 37%
10 years 25% 56% 223% 263% 15% 123%

Source: Morningstar, 1 March 2022. Past performance is not a guide to the future.

Note, this doesn’t include dividends, which in all periods would have improved long-term performance. It’s also important to remember that this is the past, and the above performances may not be repeated in the future. 

However, even without the dividend tailwind, markets have delivered positive returns for investors able and willing to sit out short-term ups and downs. Even in the case of the Second World War, which lasted five years, the Dow Jones was trading higher in 1949 than when war broke out in 1939. 

Of course, events don’t happen in a vacuum. The 9/11 attacks, for instance, took place in the middle of a wider bear market following the dot-com bust, a downward slide that didn’t hit the bottom until late 2002. Still, staying invested for the long term would have paid off.

Keep to the plan

What might this mean for investors? 

We think there are compelling grounds for investors to sit out the turbulence. Valuations have fallen, but when this happened in the past, they eventually came back – albeit past performance is no guarantee of future performance. 

History highlights the importance of a diversified portfolio. Different asset classes perform differently under different conditions, and it’s very difficult to predict what the effect of any given situation will be. 

Initial market reaction to each conflict by US asset class

Second World War Cuban Missile Crisis Soviet-Afghan War Gulf War September 11 attacks Russo-Georgian War
US large caps -4.0% 0.6% 2.1% -9.0% -8.1% 1.4%
US small caps -10.5% -3.7% 5.9% -13.0% -12.8% 3.4%
US long-term corporate bonds 0.8% 0.7% -1.1% -2.9% -1.5% 1.2%
US 5-year government bonds 0.7% 0.5% 0.9% -0.9% 2.5% 1.0%

Source: CFA SBBI data, 2 March 2022. Chart shows monthly returns for US asset classes in the month in which each conflict started. Past performance is not a guide to the future.

A casual glance might suggest government bonds are the safest place to be in a crisis – since they generally don’t show significant losses during the early days of conflicts. However, switching out could cost investors in the long term. The table below shows returns ten years after the conflict began (including dividends).

Performance in the 10 years after the start of each conflict

Second World War Cuban Missile Crisis Soviet-Afghan War Gulf War September 11 attacks Russo-Georgian War
US large caps 122% 174% 415% 408% 21% 176%
US small caps 471% 291% 360% 347% 81% 197%
US long-term corporate bonds 34% 34% 236% 127% 117% 111%
US 5-year government bonds 22% 56% 211% 102% 76% 34%

Source: CFA SBBI data, 2 March 2022. Past performance is not a guide to the future.

Over the long term, equities have consistently been the better performer, with smaller companies topping the table more often than not.

A portfolio that holds only equities exposes you to significant falls in times of crisis. But selling those equities, or ceasing to invest in them, risks missing out on the future upside. Investors are likely best served by maintaining a diversified portfolio through the cycle – you should form your own view. 

VCTs and EIS investments

The history of VCT and EIS investments is comparatively short – making historical comparisons difficult. However, we think there are reasons to remain positive in the long term.

While high risk, smaller companies have the potential to deliver high returns (illustrated in the US Small Caps line of the table above) – and this has remained the case even in previous times of crisis). Investors should remember though that EIS and VCT companies are yet smaller, and therefore also riskier – one of the reasons they should form only a small part of an investor’s overall portfolio.

Those considerable risks are partially offset by generous tax reliefs, which can be received upfront, and the fact these are long-term investments. EIS investments have to be held for at least three years to retain tax relief and VCTs for five. Given smaller companies have historically delivered good returns over longer periods, this should be no bad thing. But it does mean investors should only use money they can afford to tie up for an extended period.

Looking at the current crisis specifically, smaller companies may be better placed to weather Russia being cut off from the global financial system, at least initially. They are likely to be more domestically exposed than larger companies, so while economic turmoil in the UK can hurt, sales in Russia may be immaterial. 

For that reason, we continue to believe smaller private companies have a place in portfolios of high net worth investors who can afford to take the risks associated with these investments. The current crisis doesn’t change that, just as it doesn’t change the importance of a well balanced portfolio in more mainstream investments.

See historic performance of the Dow Jones

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