Geopolitics, Liquidity Managing wealth through crisis and war

This weekend, Hamas launched a surprise cross-border invasion into Israel that claimed the lives of hundreds of people and injured thousands, including many civilians who were intentionally targeted. The attack has been condemned by the United States, the United Nations Security Council, and many nations around the globe. Unfortunately, this could be the prelude to an even larger conflict in the Middle East. Israel responded to the attack by bombing more than 1,000 targets in Gaza, and there have been reports of fighting along the Lebanon border where Iran-backed Hezbollah has reportedly launched missiles into Israel. Our thoughts are with the innocent families who are caught in the crossfire.

The sad truth is that there are many examples of conflicts in the region and across the globe. As we look at past geopolitical shocks, we are reminded that many of these terrible events also brought out the best in humanity. One other thing to keep in mind is that people who rely on their investments to care for their families have historically had little to fear from geopolitical shocks.

These events—even those that have changed the course of history—have rarely caused a global recession or left a lasting mark on markets. In fact, the S&P 500 moved higher over the three years following almost every incident. An investment in a globally diversified portfolio of stocks and bonds would have been even more resilient, and staged a faster recovery.

Strategies for dealing with geopolitical risks

1. Stay invested. Although market shocks from war and geopolitical crises tend to have temporary effects on long-term market growth, investors are often inclined to sell because of immediate uncertainty, hoping to re-invest in the market after the crisis has passed. Selling is counterproductive, locking in otherwise-temporary losses and degrading your ability to participate in the next market recovery.

2. Separate short-term concerns from long-term goals. In times of uncertainty, having a Liquidity strategy—funds that are earmarked to meet your spending needs over the next 3-5 years—can help to provide comfort and context. By investing your Liquidity strategy in investments that are insulated from geopolitical and market risk—such as cash, bonds, and borrowing capacity—it can help you to reframe volatility and maintain a healthy allocation to growth investments in the rest of your portfolio, where they will have time to recover from short-term market disruptions before you need to tap into them to fund spending.

3. Focus on what you can control. Unfortunately, we do not have control over how markets behave, but we do get to decide how we respond. In times like these, we feel a strong urge to do something—anything—to gain control over the situation. In behavioral finance, this type of anxiety is called “action bias,” and it's a very common trait for investors. Strategies like tax-loss harvesting and rebalancing can be a good way to “scratch the itch” of action bias while keeping your long-term strategy intact. If you do still feel inclined to make a big change to your long-term strategy or plan, talk through your concerns with your financial advisor, and give yourself some time—at least a week or two—to reconsider.

Please speak with your financial advisor to learn more.

Main contributors: Dan Scansaroli and Justin Waring

Read the original blog Managing wealth through crisis and war 9 October 2023.

Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.