Geopolitical Events: Should They Influence Your Investment Strategy?
With ongoing conflicts in Russia-Ukraine and the Middle East, many investors ask me how these events should impact their investment approach. The headlines are constant, and market reactions can be immediate—but what's the actual long-term impact?
Market Reality vs. Media Narratives
Research consistently demonstrates that geopolitical events, while dominating news cycles, rarely have significant impacts on medium or long-term market performance. Investment markets inherently factor in risks as just one element among many that influence their movement. In fact, major geopolitical events are often largely accounted for in market valuations even before they unfold. Bloomberg headlines might trigger immediate market reactions, but these effects typically dissipate quickly.
The Data Behind Market Resilience
Throughout my career, I've observed that attempting to trade around geopolitical shocks rarely benefits portfolio performance. The data bears this out: while markets may show negative pressure in the three months following a significant event, performance typically normalizes at the six and twelve-month marks.
In fact, studies have shown that geopolitical threats, like threats of war or terrorism, have a greater adverse effect on stock returns than the geopolitical acts themselves.
Research also shows that in cases where markets do see negative performance after a geopolitical event, the median time to full market recovery is only a matter of weeks. Often, this recovery can happen immediately or within a few days – hardly enough time to make it worthwhile for the average investor to trade around.
Sector and Geographic Concentration Matter
Geographic and sector concentration, however, can certainly matter to your portfolio. Geopolitical events can greatly impact specific sectors, especially in the geographies closest to where the shock occurred.
For example, during the Russia-Ukraine conflict, most major indices and even the broader German market have performed well, while German manufacturing companies have faced substantial challenges due to their direct exposure. If your portfolio were concentrated solely in German small-cap stocks that are much more exposed to domestic GDP, you'd certainly dispute the claim that you’ve seen no impact to your investments since the start of the war.
In a similar vein, the economic consequences of Brexit disproportionately affected the United Kingdom, far exceeding the impact on any other region. In the 5-year period post the Brexit referendum in 2016, a portfolio only exposed to the UK market would have significantly underperformed a portfolio with broad exposure to major indices.
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Our Recommendation
This underscores our consistent recommendation: maintain a diversified portfolio. Diversification provides natural insulation against geopolitical disruptions, allowing investors to weather short-term volatility while staying focused on long-term financial goals.
For most investors, maintaining discipline through these headline-driven events is far more valuable than attempting to predict their market impact. The evidence suggests your investment strategy should be driven by your financial goals and time horizon, not by geopolitical headlines—no matter how dramatic they may be.
Sources →
Figure 1: Historical geopolitical risk and the behaviour of stock returns in advanced economies, Ritholz, JPMorgan, Robert Shiller and Haver Analytics
Figure 2, 3: Calculations made using public market data using Yahoo Finance.
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