On Feb. 28, the U.S. and Israel launched an attack on Iran, setting off a rapidly escalating conflict across the Middle East. Fighting has spread to other countries, bringing with it destruction and loss of life. In addition to the humanitarian toll, the conflict is making economic waves globally. These events have investors worried and markets reacting.
What Exactly Has Markets Concerned?
Investors worry that rising oil prices could slow the economy. Energy is a key input for transportation, manufacturing, and other activities. When oil prices spike, many industries face higher costs.
Investors are also concerned about inflation. Higher energy prices can lead to broader price increases. What’s more, many investors were hoping the Federal Reserve would lower interest rates to boost the economy. If inflation rises, the Fed may be less likely to do so.
A Well-Diversified Portfolio Is Built for Moments Like This
While the headlines are alarming, it’s important to remember that a well-diversified investment portfolio is built to withstand moments like this. In fact, chaotic times like this are exactly when the value of diversification really shines through.
When your portfolio includes allocations to U.S. and international stocks, bonds and cash, the bond portion of your portfolio can help provide stability if stocks become more volatile, helping smooth overall portfolio fluctuations.
Within the stock portion of a portfolio, diversification also helps manage risk. Some sectors may struggle when energy prices rise. On the other hand, energy companies might benefit from rising prices, potentially helping offset losses elsewhere.
A diversified portfolio does not mean you won’t experience losses. However, downturns may be less dramatic than those of broad market indices like the S&P 500.
It’s also worth remembering that most investment portfolios are invested for the long term. Short-term market movements can feel uncomfortable, but the assets that fluctuate the most today typically are the ones you won’t need to draw on for your near-term liquidity needs. As a result, you may not need to change anything about your portfolio to respond to the current news cycle.
A Final Perspective
In times of geopolitical crisis, it’s natural for people and markets to react quickly. But the reality is no one really knows what will happen. For long-term investors, the best bet is usually to stay the course.
History can provide clues, and perhaps a bit of comfort. Denise Chisholm, director of quantitative market strategy at Fidelity, looked into geopolitical shocks from Pearl Harbor (1941) through Russia’s invasion of Ukraine (2022). She found that, on average, U.S. equities returned about 8% over the following year, on par with their long-term annual average.
The good news is, for most representative Conrad Siegel moderate portfolios owning 40-60% global stocks, year-to-date investment performance through March 24th has been relatively stable, with limited deviation around flat performance. If you have questions about how current events may affect your portfolio, don’t hesitate to reach out. We’re always happy to talk through your concerns and help you stay focused on your long-term plan.