With President Donald Trump making headlines on an hourly basis and our social media accounts going crazy with comments on his presidency, we are left asking ourselves: Should we perhaps change our investment strategy as a result?
First we need to identify what this alleged “new risk” - Geopolitical Risk - is. Geopolitics is defined as the study of how geography and economics influence politics and the relations between countries. An example of geopolitical risk would include a flare-up of tensions between Saudi Arabia and Iran that resulted in a spike in the price of oil.
Another example includes a banking crisis in Europe that results in foreigners buying U.S. Treasuries in vast quantities, which could result in American bond yields falling (supply versus demand – the greater the demand – the lower the yield gets pushed).
However, history tells us that financial markets are capable of absorbing a great deal of negative news and pricing in that information accordingly (arguably, the biggest issue markets confront is uncertainty). Below are some real geopolitical events and their past effect on the markets:
Source: Nystedt, Jens; “Is it time for Markets to Worry about Political Risk?” Council on Foreign Relations, Morgan Stanley Investment Management, 4/26/2017
As you can see in the examples above, there is a not a huge variation in returns immediately following a negative event (as shown in the 5th column represented by the next day’s % change in the markets). From there, the majority of “Days to Recover” from a market bottom (following that specific geopolitical event) are between 1 day to 36 days (with a couple of outliers at 188 days and 209 days, but still less than 1 year).
History does tend to repeat itself (although I can guarantee the geopolitical event will be somewhat different this time), so given the data above we can show that although it does have some impact on the markets, but it does not have a big impact. We may feel like it has a huge impact on the stock markets, because of one of the most powerful and paralyzing emotions we here at New England Capital see on a weekly basis with clients – fear. Fear of the unknown, fear of getting into a war, fear of one more Tweet!
In my opinion, what we should be concerned about more than geopolitical risk is market risk. Market risk is defined as the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he/she is involved. The four factors in market risk are:
These are the risks that our Investment Committee reviews, analyzes, assesses, and makes adjustments so that we can try to mitigate those risks in the best way that we can, while trying to obtain the greatest rates of return for the least amount of comparative risk.
My final advice is this – don’t get caught up in the emotional aspect of Geopolitical risk. As you invest over the long term, short term market movements (and losses) are temporary. We have put together diversified portfolios for you with some of the best portfolio managers in the world. No one knows where the next 6 months will take us, but what I do know is that a well-diversified portfolio (based on your risk tolerance) will be your key to long term financial independence!