How Should Investors React to Geopolitical Shocks?

You wake up one day and someone has attacked someone else in a wasteland on the other side of the world.  The important-sounding man on TV is telling us that everything has changed and that things will never be the same.

But they will be the same.

Because in 18 months that same exact important-sounding man will be on another channel discussing yet another geopolitical event as though things will never be the same.  That’s what he’s brought on to do.  The words vary little from “crisis” to “crisis” but sometimes his tie does.  Sometimes even that remains the same.

Nancy Miller has an article up at The Fiscal Times that examines the question of what investors should do – if anything – to their portfolios when global events turn violent.  I have a few quotes in the piece that are meant to give people perspective:

“If you say because of what’s happening in Libya or Egypt that you will buy oil — you’re not investing. You’re gambling,” says Joshua M. Brown, vice president of Fusion Analytics and author of The Reformed Broker. Brown notes that if you bought the “peace dividend” story after the Berlin Wall fell in 1989, you would have gotten caught in a two-year stock market recession. Similarly, if you pulled your money out of the market after 9/11, you would have missed a rally that lasted more than six years, he says.

My message is that these events come and go, they should not be the basis for someone constructing any kind of long-term plan around even though they are certainly tradeable events for the fleet-footed.

And while many grownups understand that televised “news analysis” is a business, many can’t help but to feel as though they’re supposed to be “doing something” with their portfolio each time some Fourth World hellpit has a flare-up.  As if they haven’t been cutting each others’ heads off in places like Libya and Afghanistan since the beginning of time.  Please.

The reality is that for the most part, stock markets that sell off on geopolitical surprises should be bought rather than sold.

Taking it a step further, when we’re talking about conflicts that eventually involve our military, the buying opportunity has historically been even greater at times – stocks breaking out to the upside on the relief of war’s actual start after months of drum-beating foreplay.   On top of that, the deficits we tend to run during wartime eventually make for nicely inflationary environments, the kind that produce a spate of high-growth years for the economy.  For a reference point on this stuff, go check out My Favorite Chart on Earth.

My message here is that there are tons of things to be concerned with right now, the least of which are protests in the Mideast (which in the long-run are probably excellent developments rather than negative ones).  There was “geopolitical uncertainty” on September 10th 2001 just like there was on September 12th 2001, the difference being that on the 10th no one realized it and on the 12th it seemed as though we’d never return to normalcy again.

Focusing on long-term goals and the rates of return needed to achieve them is much more intelligent than trying to game tomorrow’s volatile headlines.

Read Also:

The Big Market Worry: Investor Overreaction (The Fiscal Times)