In the ever-evolving landscape of global markets, investors may find themselves grappling with the impact of geopolitical unrest. The ebb and flow of international relations can send shockwaves through financial markets, leaving some investors in a state of uncertainty. “We are in the midst of unsettling and sometimes frightening global conflict,” said Matson Money Founder and CEO Mark Matson. “It’s not uncommon for individuals to question their investment strategies when faced with global unrest. However, historical data suggests that there might be less cause for concern than one might initially think.”
The Uneasy Nexus: Global Unrest and Investor Anxiety
Global unrest, characterized by political tensions, trade disputes, or even armed conflicts similar to what investors are seeing today during the Russia-Ukraine war and the Israel-Hamas war, can unsettle even the most seasoned investors. The uncertainty that often arises from such events can lead investors to question the fundamental principles that underpin their investing strategies. “The fear of market downturns and economic instability can prompt emotion-driven reactions, such as selling off assets, moving funds to perceived safe havens, or potentially even more catastrophic, getting out of the market altogether,” said Matson.
It’s crucial to acknowledge that these concerns are not entirely unfounded. The inherent volatility associated with geopolitical events can indeed lead to short-term market fluctuations. However, a knee-jerk reaction based solely on the fear of the unknown may not always be the most prudent course of action.
The Unlikely Dance: Global Conflict and Market Declines
“Contrary to common intuition, historical data reveals a surprising observation,” says Matson. “There is often little to no correlation between global conflict and long-term market declines.” While it might seem counterintuitive, markets have displayed resilience in the face of global turmoil.1 Examining various periods of unrest, from regional conflicts to global tensions, reveals that markets have a remarkable ability to recover and adapt.1
One of the reasons behind this phenomenon is the dynamic nature of global markets. Markets are influenced by a multitude of factors, including economic indicators, corporate performance, and monetary policies. While geopolitical events can create short-term fluctuations, they seldom have a lasting impact on the overall trajectory of prudently diversified portfolios.
Investors who stick to a long-term strategy based on empirically tested academic investing research may be better equipped to stay disciplined during times of global unrest. Understanding that markets have weathered storms before and emerged stronger can provide a sense of perspective. For example, during World War II, from 1939-1945, the Dow Jones Industrial Average was up more than 7% per year, a total of 50% by the end of the war.1 Instead of succumbing to panic, investors might find solace in the knowledge that markets are often resilient.
Weathering the Storm: The Power of Globally Diversified Strategies
In times of global turmoil, maintaining a steadfast commitment to a globally diversified investment strategy can help mitigate risk.2 Diversification involves spreading investments across different asset classes, sectors, and geographic regions.2 This strategy aims to alleviate risk by not putting all eggs in one basket, potentially allowing investors to capitalize on opportunity while minimizing exposure to specific market shocks.2
A globally diversified portfolio can provide a level of insulation against the localized impact of geopolitical events. While a particular region or sector may experience turbulence, other areas of the portfolio may be performing well, helping to offset losses.2 This approach can not only enhance risk management but also position investors to participate in the potential recovery of affected markets.2
Moreover, staying committed to a diversified strategy can help foster a long-term perspective. Rather than making potentially impulsive decisions in response to short-term movements, investors can maintain confidence in their chosen approach. This resilience in the face of uncertainty can be a hallmark of successful long-term investors.
While global unrest may be unsettling, investors can find reassurance in historical trends that indicate little to no correlation between geopolitical events and sustained market declines.1 By staying committed to a globally diversified investment strategy, investors can weather the storm with confidence. The key lies in understanding that markets are resilient, and a prudently constructed portfolio has greater potential to withstand the challenges presented by the ever-changing global landscape. “We are a stand for a more peaceful global future,” said Matson. “We have felt the fear with you, but we have never once wavered to do what is best for you, which is to coach you to stay disciplined. Investors should invest for the next 20 years, not the next 20 minutes.”
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- D’Souza, Deborah. How War Affects The Stock Market. Investopedia. Published October 11, 2023. Retrieved 10 January 2024 from https://www.investopedia.com/solving-the-war-puzzle-4780889#:~:text=The%20outbreak%20or%20anticipation%20of,have%20shown%20resilience%20over%20time.
- Lioudis, Nick. The Importance of Diversification. Investopedia. Published June 15, 2022. Retrieved 10 January 2024 from https://www.investopedia.com/investing/importance-diversification/.
This content is based on the views of Matson Money, Inc. This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.
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