Following last week's Hamas attack and the prompt reaction by the Israeli government, global discussions have once more shifted towards the topic of war.
The distressing events and the unfolding human tragedy in Israel and the Gaza Strip have deeply affected us all.
Many are understandably concerned about the potential escalation into a broader conflict, especially during this period of global uncertainty.
Right now, our primary concern is of course on those who are directly or indirectly affected by the turmoil in the region.
Yet even though the human toll of war is immeasurable and far surpasses any financial cost, it's understandable many investors are looking for some reassurance about the impact on their portfolios.
So, how can you safeguard your wealth during times of geopolitical turbulence?
Imagine it’s 28 years ago, 1993:
- The first web browser was developed and released, which marked a significant milestone in the growth of the World Wide Web
- The European Space Agency launched the Mars Express mission, which included the Beagle 2 lander, to explore the planet Mars
- JK Rowling was writing the first Harry Potter book, which would later be published in 1997
A stranger offers to tell you what’s going to happen over the course of the next 28 years, taking you to 2021:
- Asian contagion
- Russian default
- Tech collapse
- Stocks’ “lost decade”
- Great Recession
- Global pandemic
- Second Russian default
Would you invest (and stay invested) in the stock market, knowing those events were going to happen?
If you had, from January of 1993 to December of 2021, the US stock market returned, on average, 9.6% a year.
How can this be?
These returns are very much in line with the history of the stock market. The market is doing its job. It’s science.
The chart below shows the growth in world equity markets despite a never-ending stream of negative world events. It shows why ‘time in’ is more important than ‘timing’ for your financial plan.
Global equities and world events Aug 1998 to 11 Oct 2023
Data: Morningstar Direct © All rights reserved – Global equities – Vanguard Global Stock index $ Acc. In GBP
Events like those above are widely followed by investors, who try to guess what will happen next to oil prices, inflation and bonds, to name a few possible scenarios. This is fuelled further by worrying headlines from the financial media.
Geopolitical risk is a part of investing in global markets. But current market prices quickly incorporate expectations about the effects of these events on economies and companies.
Our investment approach centres on using information in current market prices, rather than trying to outguess them.
While challenges like war certainly warrant our attention and deep concern, they don’t have to be a reason to panic about markets when you’re focused on long-term investing.
Investors with well-diversified portfolios understand that they own a wide array of countries, sectors, and individual companies, and their bond investments are typically quite resilient. This broad diversification should help them weather any investment challenges they may face, just as it has proven to do, successfully, over the decades.
Flexibility is crucial in managing portfolios through these events. No two events are the same, but common themes are uncertainty and rapid change.
While no one can predict when these events will occur or exactly what form they'll take, you can plan for them by holding diversified portfolios and building flexibility into your financial plan.
Investing in markets is uncertain.
The role of markets is to price in that uncertainty.
There have been a lot of negative surprises over the past 30 years, but there have been a lot of positive ones as well.
The net result is a stock market return that seems very reasonable, even generous. It’s a tribute to human ingenuity that when negative forces pop up, people and companies respond and mobilise to get things back on track.
War is unpredictable and devastating, making wealth preservation during such times a secondary concern at best.
But I'm an optimist, because I have unwavering faith in people and their resilience when faced with challenging circumstances.
Back in 1993, very few would have predicted an almost 10% average return for the stock market. However, this extraordinary return was within reach for anyone who could open an investment account, invest in a diversified portfolio, and let the market work its magic.
To reap the benefits, you must think long term.
When you invest this way, you're not attempting to predict which stocks will prosper and which may struggle to bounce back. Instead, you're placing your trust in human ingenuity to overcome challenges and find solutions.
Try not panic. Invest for the long term.
My heart goes out to the millions of innocent civilians that have been impacted by the recent conflict. Let's hope for better times ahead, for everyone.