Investing during Wartime: How does the Geopolitical Climate impact your Financial Planning?

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Don’t let Geopolitical Strife destroy your Investment Resolve.

This month, I was planning to write about financial planning for small- to mid-size business owners, including ways to optimize your personal and corporate tax planning. I believe many of you will find the information useful, so I promise to publish that soon.

But not now. Not after Putin invaded Ukraine. It feels wrong to go about business as usual while most of us are asking important questions about this geopolitical crisis.

By no means do our financial concerns detract from the greater, human toll. That said, if I can help you remain resolute as the world justifiably severs Russia’s access to capital markets and the global economy, perhaps we can both do our part to restore justice in Ukraine.

So, let’s talk about geopolitics and investing during wartime. Here are my key takeaways:

Big picture, geopolitical events’ impact on financial markets are usually short-lived

To help you keep your financial wits about you, consider Vanguard’s historical perspective on how the U.S. stock market has responded to other geopolitical crises over the past six decades. As Vanguard’s chart depicts in the article Ukraine and the Changing market environment, the turmoil has typically translated into initial sell-offs. But markets have also exhibited remarkable resilience, delivering returns in line with long-term averages as soon as six months later. That’s not to predict the same outcome this time, but it reinforces the wisdom of betting for vs. against the market’s staying powers.

Credit: Vanguard – Ukraine and the changing market environment

In Vanguard Canada’s recent article, When the markets seem to turn against youGreg Davis, Chief Investment Officer recommends a steadfast approach:

“A new dimension of risk has entered the financial markets with heightened tensions in Ukraine …

We know this, however, about equity markets in the context of geopolitical risks: they’ve been resilient, much as markets have always been resilient in the face of various risks. We expect the markets to work themselves out, reaching new heights over time and at varying paces …

So now is not the time to give up your fortitude. Now is the time to take it all in with a deep breath, knowing that this day would come — and knowing that it will pass.”

Speaking of predictions, ignore those who claim to know what’s going to happen next

In their landmark studies on political forecasts documented in their book, Superforecasting: The Art and Science of PredictionWharton professor Philip Tetlock (a Canadian, by the way) and co-author Dan Gardner found that we’re unlikely to do our net worth any favors by depending on the “expert” predictions you may be seeing on the daily news:

“People who generate better sound bites generate better media ratings, and that is what gets people promoted in the media business. So, there is a bit of a perverse inverse relationship between having the skills that go into being a good forecaster and having the skills that go into being an effective media presence.”

In other words, those forecasts you’re hearing are more likely to sound like sure (often scary) bets, and less likely to be reasoned reflections on the many ways any given event might play out. In fact, evidence suggests, the more certain an expert seems about their forecast, the more skeptical you should be about its worth.

Question your own assumptions

No matter what your gut reactions may be, you’ll rarely need to look far for sources that feed them, which can further encourage the temptation to believe that breaking news is trade-worthy information. Because nobody enjoys being proven wrong, we are subject to what behavioral psychologists call confirmation bias. We instinctively seek out sources that support our existing beliefs and tune out those offering conflicting views.

This isn’t the first wartime crisis we have been asked to endure

The truth is, as horrific as current events are, they are not unprecedented. For example, in a recent Wall Street Journal piece, Jason Zweig cited a Journal of Finance study by William Goetzmann and Philippe Jorion, “Global Stock Markets in the Twentieth Century.” As Zweig reported, the study found that “Trading was halted in major markets outside the U.S. for months or years at least 25 times in the 20th century.” He added, “War is usually the culprit.”

Despite many past crises, markets have continued to deliver satisfying returns over time (often just when the news is at its darkest). This boosts our confidence that our existing, evidence-based investment strategy remains your best approach for navigating the current straits as well.

Because we can’t predict, we plan, diversify, and engage in patient trading

As we’ve covered in past posts, evidence-based investing offers three key lines of defense, custom-built for times like these:

  1. Having a personalized plan and disciplined process to stick to over the long haul gives you the equivalent of a compass to follow sight unseen when the future is especially foggy and you’re sorely tempted to alter course.
  2. By globally diversifying your investments and spreading them across multiple sources of expected risks and returns, you’re never overly concentrated on too few “bets.”
  3. By investing in funds whose managers engage in patient trading, you can stick to your personal plan while minimizing the damage done by dramatic market turmoil … such as when Russian markets essentially closed for business overnight.

To explain that third point, Dimensional Fund Advisors published a paper, “Navigating Geopolitical Events:
“In some cases, geopolitical events have led to temporary market closures, impacting all stocks in a certain market for a period of time…

Flexibility is valuable in managing portfolios through these events …

If we halt investing in a market or in certain stocks, we can continue trading across multiple other eligible countries and securities. Unlike traditional index funds, we are not constrained to follow the actions of a benchmark during these times.”

Don’t give in to tyranny: insulate your personal and financial independence

None of this discussion is to say we’re going to forget about current events, as if they’re of no consequence. In fact, I expect most of us will never view the world in quite the same way again.

But it’s one thing to feel moved by emotionally charged news, it’s another to let it overwhelm you. We can marvel at the nearly universal condemnation of Putin’s warmongering. We can hope the unprecedented level of support for the Ukrainian resistance leads to a satisfactory resolution.

Most of all, we can remember: one of the best ways for liberty to prevail over tyranny is to refuse to ever let a bully’s actions take control of our personal or financial independence.

I’ve said it before, and cliché as it is, I’ll say it again: Stay the course!

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on March 30, 2022 and is republished here with permission.

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