January was a tough month due to Fed tightening and inflation fears and February deteriorated further as the Russian invasion of Ukraine rattled global markets. My blog post on February 2, “It’s Always Something!” highlighted the fact that managing risk is part of the investment process and as long as your risk profile matches your investment time horizon and goals, your chances for success are improved.
Per the table below, most every asset class (including bonds!) was down for the first two months of 2022 with the only major exceptions being gold and energy; gold as a traditional safe harbor and energy due to potential supply disruptions causing an historic price spike.
Going forward, there continues to be significant risk in the market. Financial sanctions imposed on Russia from the western countries can pose a serious threat to economic growth and financial market stability around the world. This is mostly due to Russia’s large energy exports to the European markets and global supplies but also due to the curtailing of money flows through SWIFT and other systems.
From a portfolio management perspective, the turmoil has caused most asset classes to move into negative territory and diversification, once again, leading to underperformance. For example, key diversifiers like emerging market bonds, REITs, and factor exposures in momentum and minimum volatility (of all things!) have been a drag on total portfolio performance. Over time, of course, we expect these exposures to revert to a more normal profile.