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As military activities escalate in the Middle East, markets respond with volatility and investors are gripped with panic and anxiety. The obvious instinct is to take action, to sell the risk assets, chase the so-called safe haven assets or try to take advantage of the chaos. Two new analyses from The Globe and Mail and The New York Times, veer towards a different approach: not panicking and doing nothing.
Why Your Brain Wants You to Panic (And Why You Should Not)
When news screams “war” your brain’s fear center is stimulated. This response is evolutionary and has served our ancestors well when facing large predators but it is disastrous when applied for investor psychology during volatile markets. The urge to “fix this” feels right, but financial history has a different story to tell.
What Historical Evidence on War and Stock Markets Teach Us?
Observing war and stock market history acts as a soothing agent to panic. According to Mike Silverman, the CIO at Cresset Capital Management, analyzed the market reactions that stemmed after eight major conflicts over the last 36 years, from the 1990 Gulf War to today’s U.S. – Israeli strike on Iran.
His findings, as reported in The Globe and Mail, are striking:
- The S&P 500 dropped by just 0.37% within one week of a conflict’s beginning.
- It rose by 0.5 on average within one month.
- One month after 9/11: rose by 0.6%
- One month after Russia’s 2022 Ukraine invasion: up by 5.5%
While past performance should not be seen as a guarantee, the historical data suggests that markets have a remarkable ability to bounce back after geopolitical shocks. Jeff Sommer notes in The New York Times, “History shows that doing nothing has generally been a fine strategy when the markets act up”.
The Lure (and Trap) of Opportunistic Moves?
During conflicts, certain sectors inevitably experience significant changes. The recent US-Israeli and Iran conflict briefly:
- Pushed oil prices above $77 a barrel on supply concerns
- Boosted defence stocks such as Northrop Grumman and Elbit Systems
- Rise in Gold as investors resorted to safe haven assets
- Spike in crop stocks like Butrien on due to supply fears.
However, geopolitical risk investing via opportunistic sectors is laced with danger, Silverman points out, is the risk of “buying too late”. For example: If one buys defence stocks or gold today, what will happen to its position once the conflict de-escalates tomorrow?
Successfully timing such short-term changes is very difficult for the average investor.
Wisdom of the “Do Nothing” Investing Strategy
Both articles listed above cover the same principle: for long-term investors, a do nothing investing strategy is optimal.
If the portfolio is well-diversified, employing low cost index funds and holding broad stock and bond markets in reasonable proportions presents no excuse to make abrupt changes. This is a grounded approach, rooted in years of wisdom. It aims for the market’s average long-term return, and has historically been robust despite wars, pandemics and other crises.
Dodging short-term losses or capturing fleeting gains leads to buying high and selling low that incurs needless costs and taxes. The buy and hold strategy has consistently outperformed attempts over market-timing for decades.
Recessions Are the Real Risk
Jeff Sommer provides an important caveat: inaction is not completely foolproof. The real danger is not the conflict but the potential for that conflict to kickstart a broader economic recession.
A prolonged war that disrupts global energy supplies as well as trade will certainly hamper economic growth. However, even during a recessionary scenario, hastily reacting to headlines is rarely a cure. A well-structured portfolio designed for long-term investing, that is capable of withstanding volatile cycles via proper asset allocation is key.
What About Safe Haven Assets?
Gold was the undisputed safe haven asset and the U.S. dollar strengthened as investors sought safety. Energy stocks experienced a spike due to supply concerns. But here’s the uncomfortable truth: by the time these trends become mainstream, the easy money would have already been made.
For most investors, trying to enter into safe haven assets during a crisis is speculation, not investing. Such shifts require both entry and exit timing which even professional fund managers struggle to consistently achieve.
Discipline Over Headlines?
The best strategy for investing during war is, counter-intuitively, putting the strategy away. Discipline is paramount.
- Ignore the headlines
- Resist speculation, not matter how strong the urge is
- Focus on long-term objectives, such as retirement, child’s education and financial independence.
- Trust diversification to sail through the storm.
As Silverman puts it: “Decisions should be grounded in long-term objectives rather than short-term headlines”. In simpler words, just stay calm.
The world has survived countless crises, from wars, to pandemics, and markets have consistently bounced back and have rewarded those who remained invested through them all. This too, shall pass.
Disclaimer: This content is for informational and educational purposes only and does not constitute financial, investment, legal, or tax advice. Past performance is not indicative of future results. Before making any investment decisions, please consult with a qualified financial advisor who understands your specific financial situation and objectives.
