Don’t Let Global Tensions Derail Your Investment Plan

Life is unpredictable. And the unexpected, uncontrollable and even the unimaginable lead many to lose sleep about how global events will impact their money. If you worry about things beyond the economy affecting your investments, you’re not alone. Northwestern Mutual’s latest Planning and Progress Study found that while factors such as inflation still are top of mind, some of the biggest concerns people have about their financial situations aren’t related to Wall Street. When participants were asked to rank what they thought could make the biggest impact on their finances this year, inflation took the top spot at 57 percent, but perhaps surprisingly, the second and third most cited worries were far less tied to the economy. Government dysfunction (34 percent) and the U.S. presidential election (33 percent) were second and third. “Geopolitical conflicts” rounded out the top seven concerns at 14 percent, highlighting that it’s not just financial headlines that weigh on people when it comes to their money.

Intuitively, the results make sense. Government dysfunction, election results and geopolitical events generally do affect the markets. Markets hate uncertainty, and whenever there’s a sudden shift or threat to the established order of things, there’s usually a sharp reaction. The challenge is that no one knows how a geopolitical shock will play out in the weeks or months ahead. At the outset of unexpected negative events, there’s a tendency to gravitate toward worst-case scenarios. Fear is typically at its highest point when the initial shock sets in, yet we can’t forecast what’s coming. But it’s important to remember that the size of the impact on markets can vary and may pass far sooner than you’d expect.

Geopolitical challenges are nothing new

Over the course of our lifetimes, we have endured political uncertainty, 9/11, recessions, wars, social unrest and, most recently, a protracted pandemic that has shaped our country. Despite the wall of worry those events created the stock market persevered—since 1970 the annualized total return of the S&P 500 is better than 10 percent. Investors who took the slow and steady approach by investing $1,000 in 1970 and staying invested during the dramatic challenges of the past 50-plus years would have $241,270 by the end of 2023.[1]

In fact, as the chart below shows, significant events during the past 50 years have caused short-term market volatility, but the initial selling pressure quickly faded. Some of that is because the sheer size and diversity of the global economy makes it incredibly resilient.

[1] Source: Northwestern Mutual Wealth Management Company and Morningstar Direct. Stock market returns are since 1970. The annualized total return of the S&P 500 since 1970 is 10.4%. 

“It’s hard for a single major event to move the $29 trillion U.S. economy, much less the global economy, over the long haul,” said Northwestern Mutual Wealth Management Company Chief Investment Officer Brent Schutte. “Certainly, we’ve seen events such as COVID cause volatility and short-term selling pressure, but eventually the markets find their way back.”

Even after the attacks on 9/11, the world and markets adjusted relatively quickly. Stocks fell 4.92 percent the day of the attack and an additional 0.58 percent on the first day of trading following the attack (the markets were closed after the event until September 17, marking the first prolonged closure of markets since the Great Depression). But three months later, markets had reversed course and were up nearly 4 percent. Markets adapt quickly and are more durable than people tend to think.

Missing out because of fear?

Unfortunately, the temptation to jump out of the market right after a significant world event occurs can be strong. You may feel selling early and sidestepping at least some of the negative reactions in the markets will lead to better results over the long term. But investors who try to time the market at the point of maximum fear run the risk of missing periods of exceptional returns, which can hurt portfolio returns in the long run. In fact, missing just the 10 best days over the last 20 years would have caused an investor’s portfolio to return less than half of what it would have if the investor had stayed fully invested through ups and downs. The difference in results reflects not only the loss of returns on the best day, but also the compounded returns of those gains going forward.

When the markets are down, deviating from a long-term investment strategy can increase the odds of missing the best days. That’s because volatility tends to cluster. The best up days and the worst down days tend to occur near each other. In fact, of the 50 largest single-day stock market gains during the past 20 years, 47 of them occurred during bear markets (a bear market is typically defined as one in which stocks decline 20 percent or more from the previous high). So even if you are lucky enough to miss one of the bad days, odds are that you will also miss some of the good days. Missing those strong days can have a significant effect on your long-term investment performance.

While we caution against making wholesale changes to your investment portfolio or financial plan in response to a geopolitical event, that doesn’t mean we simply ignore a changing world. Wars, global leadership changes, and political tensions in Washington can and will create headwinds and tailwinds in different countries and asset classes, but we don’t recalibrate portfolios in the fog of uncertainty. The time to rebalance and readjust your risk exposure is in calm markets and on your terms.

Finally, geopolitical risk is just one of many factors to consider when people develop an overall outlook for markets and their finances. Investors also need to consider the state of the economy, their personal goals, interest rates, inflation, taxes and a host of other factors. Geopolitics is an input in a sound investment process, but it’s not an investment thesis.

While no financial plan can predict the specifics of every bump along the way, your financial advisor can develop a plan that accounts for the unknown.

Your decision to work with us to manage your money lets you grow your wealth while protecting everything you’ve worked so hard for—no matter where you’re starting from. The financial plan your advisor helps you build should help you resist the urge to change your long-term investment strategy during occasional global turmoil. The plan is tested against ups and downs and is designed to help you reach your goals through them. It should free you to look past sensationalized media headlines and focus on the importance of staying invested through multiple market cycles and events.  

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.

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