Russian stock market was closed; could it happen here?
Ric Edelman: Welcome to the program. You're listening to The Truth About Your Future. And I'm getting a lot of questions from folks, a lot of emails over the past several weeks pertaining to the war in Ukraine wondering, gee, the Russian stock market is closed. This occurred because the economic sanctions caused Russian stock prices to fall 40% in value, and then Putin shut down the exchanges. The financial markets are closed in Russia because of the economic crisis that the war has created, not just in Ukraine, of course, but also, in fact, in Moscow. And it has led to some folks writing to me asking, "Ric, could that ever happen here? Could our stock market ever close?" Well, financial markets have been closed outside the US for months at a time or in some cases even years. It's happened over the past century 25 times, even including here in the United States. The New York Stock Exchange closed for six months at the outbreak of World War One. So you need to be aware that, yeah, it can happen. The aftermath of 9/11, the financial markets were closed along with banks for several days. The government wanted to protect and prevent against the risk of runs on the bank or people selling in a panic, which would have a huge negative economic implication for the country.
Ric Edelman: So by taking a break and giving everybody a chance to think about it and recognize the longer term of what's going on, by the time the markets reopened, and the banks reopened, calm was largely restored to the nation, and that helped to reduce the risk of a run on the bank or massive selling in the market. We've had this kind of situation several times, so yes, it certainly could occur. I'm not suggesting that we are about to experience another closing of our financial markets. I'm simply saying the following: You need to recognize that it's possible. We've had a lot of bank closures; they happen pretty routinely, in other words, with every snowstorm. Right. So it happens from time to time. If you are in urgent need of cash and you're assuming that you can just wander over to the ATM, well, don't assume that such an opportunity exists. This is why you need to have ample cash reserves. Sure, a rainy-day fund representing a couple of years of spending - safe and secure in your local bank, but also having a little bit of cash on hand. Not enough that robbers are going to be tempted to break into your home, but just enough so that you can - worst case scenario, if electronic systems are offline, you can still go to the local store and buy bread.
Ric Edelman: It's really that simple. So recognize that, yeah, markets can close, exchanges can close, banks can close. It takes an unusual extreme event, weather or terrorism or war. But as history has demonstrated, those things sadly do occur from time to time. And because we are now in a global financial marketplace, ordinary investments that you might buy could be affected by something that's happening halfway around the world. The most recent illustration of this: you might own an ordinary ETF that invests in Russian stocks. You know, a big part of an investing strategy - you've heard me talk about this for decades, is the need for you to invest in stocks, but not just U.S. stocks, but also foreign stocks. This is a big, bold world these days and some of the biggest companies on the planet operate in other countries. Russia is the 11th largest economy in the world, or rather, I should say it was a month ago China, the Far East, Japan and other nations. Australia, of course, Europe, as well as South America and Africa represent massive economic marketplaces. And there are a lot of ETFs that invest in the stocks that exist in companies in those nations. This is part of a diversified portfolio. Most folks who have a diversified portfolio would routinely have anywhere from 10% to 30% of their portfolio in foreign stocks.
What if I own foreign ETFs that invest in Russia?
Ric Edelman: You may very well own a foreign ETF that has in its portfolio stocks of companies that are based in Russia. Those stocks, for practical purposes right now due to the war, those stocks are worthless. The securities of Russian companies that are in your foreign ETFs, they frankly don't exist anymore. And there are some ETFs that invest exclusively in Russia and Russian stocks. Why would somebody do that? Again, portfolio diversification. You want not just to invest broadly in foreign stocks, but you want to target specific countries like China or Russia or Japan or the continent of Europe. So if you've got a Russian ETF, that ETF is virtually worthless today. And there are some Russian companies whose stocks trade here in the United States. There's a Russian oil company, for example, that trades on the New York Stock Exchange. The shares of that stock are down 90%. So you do need to recognize that even though the financial markets themselves may remain open, the value of the securities trading on those markets could become worthless. It's all part of the risks of investing. And this is why the best approach to reduce your risks is diversification. If you have all of your money in that single stock or all of your money in that single country, you're taking what we call an asystematic risk.
The risk of a single company or a single country collapsing
Ric Edelman: Asystematic the opposite of systematic. Systematic risk is when the entire system goes down. Well, what are the odds of the entire world's global economy all imploding all at once? This systemic risk is pretty low, but the asystematic risk, meaning the risk of a single company or a single country collapsing, well, that risk is much higher. So if you're invested only in Russian companies, if you're invested only in the Russian economy, that's a much bigger risk than if you're invested more broadly in countries all around the world. So diversification goes very far to reducing your risk, doesn't eliminate it, but it definitely reduces it. And oh, by the way, let me just mention one other bizarre possibility. Russian stocks have collapsed in value. In other words, a company that was worth $1,000,000,000 in Russia is now worth virtually nothing. Could this give Putin the opportunity, the guy whose actions created that scenario, could he now nationalize every company in the country, taking them over for pennies and becoming personally wealthier than ever? Putin, not only being the world's aggressor, could be playing the most crafty and inconceivable game of arbitrage as well. Stay with us for more here on the Truth About Your Future with Ric Edelman.