How Geopolitical Events Affect the Stock Market
Russia’s attack on Ukraine temporarily rattled Wall Street, but the market quickly bounced back. However, another geopolitical event will likely cause market volatility at some point.
So should you be concerned about your investments? And what can you do to insulate your portfolio from wars and other global crises? We look at the market impact of geopolitical events and provide five steps you can take.
The Impact of Geopolitical Events on the Markets
Many investors react to alarming news, such as the Russian strike on Ukraine, by panicking and selling. History shows this initial volatility in major events like the Cuban Missile Crisis and 9/11. The markets were volatile leading up to the geopolitical event or for a time afterward, with the average post-event loss being 5%.
But markets are also adaptable, and the average recovery time after a geopolitical event has been seven weeks. Since World War II, on average, U.S. stocks were higher three months after the geopolitical shock than they were before the event. In 66% of the events, it took just one month for U.S. stocks to surpass their standing before the crisis.[1]
Over the long term, geopolitical events generally have had little to no impact.
So what does this mean for you?
How to Manage Geopolitical Risk
When it comes to investing, you’ll sleep better at night if you focus on what you can control. And there’s little that most of us can do individually to stop a war.
But what you can do is structure your finances to improve your ability to withstand short-term shocks and cultivate peace of mind. This, in turn, can help you avoid panic selling when markets get variable.
Here are five tips to help:
Invest for the long term. Creating a long-term objective for your portfolio (e.g., retirement savings) can help you avoid emotionally based reactions when markets get volatile.
Have a diversified portfolio. A portfolio that owns a range of assets in a range of sectors and industries in a range of countries can help insulate you from market volatility.
Incorporate your investment timeline and risk tolerance. When you’re younger, you’ll want a larger equity allocation than when you’re older since you have a longer timeline to recover from market crashes, recessions, etc. Your portfolio should also reflect your risk tolerance (or stomach for risk) to help enable you to emotionally withstand the inevitable short-term market volatility.
Build an emergency fund. Having six months of living expenses in a savings account can help you weather personal or economic troubles without dipping into, say, your IRA or 401(k).
Work with a financial advisor. Our wealth management firm in Roseville and Folsom, CA, and Lehi and Logan, UT, helps manage clients’ investments as part of their overall financial planning and goals. We generally advise that people work with a fee-only, fiduciary financial advisor to help ensure the advice is in their best interest.
And remember: Even with the market’s inevitable ups and downs, it has generally offered the best return for the money. For example, the S&P 500 has had an average annualized return of 10.49% since 1926. Remembering this fact could help you breathe easier when the markets have a short-term reaction to geopolitical events or other distressing news.
[1]Julia M. Carlson, “Be a Confident Investor in a Chaotic Market,” Forbes, 15 March 2022, https://www.forbes.com/sites/juliacarlson/2022/03/15/be-a-confident-investor-in-a-chaotic-market/?sh=2f93a612eb61.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.