It's a VUCA World After AllSubmitted by WWA Planning & Investments on June 5th, 2014
One of the small mysteries of my life is how my articles come into being. Sometimes I’m asked a question that seems like it might be of wider interest. Sometimes I read a book which I think others might find interesting. Sometimes a title forms itself in my mind and the article just follows. Recently I was walking down the street thinking about the situation in Ukraine while trying to get the Disney song It’s a Small World After All out of my head and realized that I had an article to share.
Our world is truly an interconnected one with global news available almost as promptly as local. The ongoing headlines about troubles in Ukraine are a perfect example. Unrest in a country over 5,000 miles away has been covered daily for several weeks even though at least some of us aren’t sure exactly where the country is or why it might be important.
Ukraine is a long way from here but it’s an important player in its corner of the world and is often described as Europe’s breadbasket. In addition to being the world’s 4th largest producer of wheat, it has one of the world’s most active space programs and has a slightly higher literacy rate than America’s. Does any of that matter here in the USA? Apparently so, as our stock markets responded to the news of President Putin mobilizing Russian troops along their common border. We saw a one percent drop in the S&P 500 on the day the news came out but why would our stock market react to a political crisis thousands of miles away?
This is a perfect example of VUCA in action, an acronym for Volatility, Uncertainty, Complexity and Ambiguity. The term began to appear in print in the early 2000’s, apparently originating in the military. My first exposure to it came in the very approachable Get There Early by Bob Johnson, published in 2007. Had Mr. Johnson asked my advice as he was writing his book, I would have recommended the acronym be presented more like a formula: U+C+A = V or simply UCAV, acknowledging that volatility is the natural byproduct of the other three factors. I suspect my interest in the concept is pretty obvious. It’s the job of a financial planner to help clients through the VUCA of their lives, hopefully staying ahead of the curve to minimize VUCA’s effects or at least to be ready with contingency plans to accommodate change as it occurs.
How do investors often react to potentially bad news? In this case, the incomplete data being received could have been interpreted as the beginning of yet another regional conflict. Had that happened, the two largest armies in Europe would have faced each other and much of Europe would have been cut off from Russian oil which flows through Ukraine. Add the potential disruption of much of Europe’s food and fuel to the possible need for US defense of its NATO allies and it’s easy to understand those sellers almost instinctive response.
But what happens when investors panic and sell stocks across the board? More sellers than buyers means that prices fall, explaining the S&P 500’s drop. Such price volatility might not be unexpected in response to the uncertainty, complexity & ambiguity investors faced. In fact, the Russian stock exchange was down almost ten percent that same day, showing that fear is fear the world over. At times of panic, those who sell stock usually turn to US Treasury bonds and those purchases (almost certainly including some by Russian investors) pushed bond prices up (and rates down) at the same time.
Anyone who’s able to sell by simply logging onto a brokerage firm’s webpage has the opportunity to overreact. One of the most important roles a financial planner can fill is being the speed bump between urge and action. Years ago, when I was selling securities as a broker, people had to call to sell stocks and I could try to lead them to a more thoughtful decision. Now that we manage investment accounts for many of our clients, we are able to slow things down on our own. We sold no investments for our clients that day, nor did we during the corrections of 2000 and 2008. We can read the headlines as well as anyone and are just as concerned about the future. However, we are committed to long term plans for our clients, so try very hard to maintain perspective.
As I write this note in early June, the S&P 500 has resumed setting new record highs almost daily, so perhaps remaining invested was the correct approach. In fact, we won’t know with certainty for a long time but trying to reduce uncertainly while planning for the future is one of the most important roles we’re called upon to fill.