During times of geopolitical unrest and market volatility such as we are experiencing now with the outbreak of war in the Middle East, clients often ask whether there is anything they should do. We empathize with the very natural desire to take action when one feels afraid and uncertain about the future. Our philosophy, however, one we have adhered to for decades, is to do our best to be proactive rather than reactive. In practice, this could mean holding sufficient cash and lower-risk securities to cover near-term expenses and anticipated cash flows, and from there constructing a portfolio with an asset allocation between higher and lower-volatility assets designed to provide a risk-adjusted return commensurate with their long-term needs.
Since the war began on February 28th, markets have experienced a sharp reversal as geopolitical tensions escalated. The humanitarian consequences of war can be severe and long-lasting, and history suggests that recovery for affected regions can take many years. Financial markets, however, often behave differently. While geopolitical shocks can trigger sharp short-term volatility, diversified portfolios have historically been able to absorb these disruptions over time.
With the recent events, equity markets have declined meaningfully. The S&P 500 is down approximately 3% and the MSCI Emerging Markets index is down approximately 6%. The traditional role of bonds as a buffer during periods of turbulence has been less effective this time around – the iShares Core U.S. Aggregate Bond ETF (AGG) is also down roughly 2%. This may reflect growing concern about stagflation: an environment of limited economic growth combined with persistent inflation that pressures the Federal Reserve to raise interest rates, which weighs on existing bond prices. But if this war continues and equity markets continue to drop, we imagine that bonds will do their job and maintain their value on a relative basis.
In times like these, maintaining liquidity for near-term needs and exercising discipline and patience with long-term investment portfolios remains essential. Market dislocations caused by geopolitical events can produce periods of significant volatility, but we believe they ultimately reward patient investors.
Please do not hesitate to reach out if you would like a brief check-in to review your financial life plan, cash flow projections, and asset allocation. Otherwise – and this will come as no surprise to those who have navigated multiple market cycles with us – we recommend staying the course and resisting the understandable urge to react during these challenging times.
