Investing Through Geopolitical Storms: How to Remain Disciplined Amid Global Conflicts
Investors are a tough bunch. We face crisis after crisis, some real and some sensationalized by our paid-to-scare media. Staying disciplined when emotions run high and fear triggers the evolutionary developed fight or flight mechanism is challenging.
Geopolitical events might be the most confusing of all risks that arise. We get used to the run-of-the-mill business cycle and financial market noise, but headlines about global conflicts are more alarming.
Understanding complex international relationships, ancient history, nuanced motivations, interconnected economies, and fragile alliances is overwhelming — even experts have a hard time accurately predicting outcomes.
Despite that, short-term traders will rush to "buy the crisis," betting on oil price swings and market volatility. And some investors will panic, abandoning their investments when fear overcomes them.
How can long-term investors remain disciplined in the face of geopolitical conflicts?
Most recently, events involving the possible Russian invasion of Ukraine have troubled investors around the globe. Russia is asserting its claim on Russian-controlled regions (Donetsk and Luhansk) despite threats of strong sanctions from the U.S. and beyond. Russian forces have built up around Ukraine for weeks, creating a whirlwind in the intelligence community and media.
This violation of Ukrainian sovereignty follows the 2014 annexation of the Crimean Peninsula that made already tense relationships between Russia and the west even more unsettled. While geopolitical events like those occurring between Russia and Ukraine can create humanitarian consequences and moments of fear, this does not mean they will have meaningful impacts on long-term investment portfolios.
It's important to understand what influences portfolio returns over different time frames. Headlines, recent results, and noise drive daily, weekly, monthly, and even quarterly performance. But over years and decades, results are the consequence of economic growth, corporate performance, and innovation.
Sure, the uncertainty surrounding the developments in Ukraine will impact markets in the short term. We've seen geopolitical events get the market's attention in the past, including during conflicts in the Middle East, nuclear threats from North Korea and Iran, and the Russian annexation of Crimea. Going further back, World War II, the Vietnam War, and the Cold War further highlight this point. In the end, business cycles usually win out.
Historically speaking, it's a fool's errand to drastically shift investments during geopolitical crises. Not only do you need to predict the outcomes and effects of such events accurately, but you also need to precisely time the investment maneuvers to capture the market's reaction. Correctly executing this combination of moves is challenging to say the least.
Taking action might help you feel better, but it might not be best for your long-term investment objectives. The events unfolding in Ukraine are serious; that's not to be understated. However, I recommend caution when making investment changes based solely on geopolitical developments.
The chart below shows the varied history of markets during major geopolitical events.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
