Geopolitical Conflict and Financial Resilience
Market behavior especially when influenced by geopolitical events is a lot like parenting – once you think you think you have a grasp on everything and no one is sick, something is bound to change. As a parent, the combination of preparation and agility (not to mention a big slice of humble pie) have thus far provided me with tools to handle short-lived crises or deviations from the norm.
Chae feels the frustrations of the unexpected … The poor tulips are innocent bystanders.
Similar tools and practices can be utilized for investing when geopolitical events and associated headlines rear their heads and create volatility in the stock and bond markets.
With how rapidly current events are shifting, I am aware that by the time this is posted, the status of the Iranian conflict very well may have changed, and market reaction most certainly will have changed. However, I do think it is still imperative to address our thoughts on how investors can handle these types of events. Unfortunately, we live in a reality in which this will not be the last of its kind.
Geopolitical Events and Market Volatility
From Hartford Funds:
“Geopolitical uncertainty can cause short-term market volatility, but the stock market has been resilient. In fact, stocks generated positive performance one year after an act of aggression for 73% of the armed conflicts since World War II. The longer the investment time frame, the more likely a positive return.”
In the past, we have shared similar charts to the below, especially around presidential elections. There has always been a reason to not invest and to feel worried; however, markets have historically proved resilient during times of geopolitical conflicts. Markets tend to digest geopolitical news relatively quickly as investors assess the actual economic impact versus the initial headline risk.
Why Portfolio Diversification Matters
I would like to add the reminder that the S&P 500 is not considered a diversified portfolio (link to Dan’s blog) and therefore investors with a thoughtful diversification strategy and more broadly based portfolio providing exposure to multiple asset classes will be able to weather short term volatility in a more prudent way. Equity, fixed income, and in some cases alternative assets often respond to geopolitical stress in an offsetting way.
Just like having boundaries in place with your children when teenage hormones come roaring in, having a disciplined approach to investing can help avoid knee jerk reactions and upending years of planning or having to undo decisions made during times of stress.
Long-Term Investment Planning
Rather we encourage planning around timelines and major goals as well as overall risk tolerance. Regardless of market conditions, if there is a need for funds within a short period of time (our definition is within a year), those funds should be invested in lower risk investments such as money markets, CDs, Treasuries, and / or short-term bonds. Planning around time frames can provide some breathing room and alleviate the feeling of needing to “get out” of the markets particularly if distributions are on the near horizon.
Other portfolio strategies that provide additional resilience to portfolios revolve around focusing on interest and dividends from stocks and / or bonds to refill short term cash “buckets” and to provide a cushion during periods of limited market returns or downturns.
During these periods of higher volatility and geopolitical uncertainty, we encourage discussing any short term timelines, cash needs, and strategies with your advisor before changing or derailing an existing investment strategy.
Being a parent and an investor can feel frustrating particularly in the wake of unpleasant headlines and events that feel out of your control. However, a well constructed portfolio (and parenting strategy) can provide agility for short term needs and an eye on long term performance and success. Your advisor is there to help you navigate these short term pains, create a sustainable plan for the future, and hopefully help provide a strategy to help you sleep at night.
