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Like many of you, we’ve been watching the horrifying developments in the Middle East. As the war with Iran causes violence to spread around the region, nobody knows how long this conflict will last.
It’s also sparked a flurry of e-mails to our inbox, including questions about whether it makes sense to sell investments and move everything to cash. And who can blame investors for their unease?
Stock markets have swooned, with the Dow Jones Industrial Average plummeting more than 2,000 points since the start of the conflict on Feb. 28 as of Thursday.
It all boils down to one question: Is it different this time?
Sadly war is the norm in the world, not the exception. While the news is currently saturated with coverage of the war in Iran, that’s because this is a new conflict. Russia invaded Ukraine four years ago and news coverage of that war has died down.
It’s worth noting that the Middle East has had some sort of armed conflict for most of this century. And every time new fighting breaks out, investors panic and rush to pull money out.
However, after a period of volatility, the stock market recovers and resumes its inevitable march higher. You can see this pattern in the chart of the S&P 500’s performance since the start of this century overlaid with the start of major conflicts in the Middle East.
It’s possible for companies to continue being profitable, and the economy to continue growing even in the middle of a war, and that’s exactly what happened over the past 26 years. Despite near-constant armed conflicts, the S&P 500 returned 358 per cent over that time, and if you had kept your money out of the stock market, you would have missed out.
One of the most toxic phrases in the investor’s vocabulary is “until the dust settles.” As in, “I’m moving to cash until the dust settles.”
Selling everything is relatively simple, but if you don’t intend to stay out of the market forever, you have to get back in at some point. And if you wait until things calm down in the Middle East, you could be sitting on the sidelines forever.
Instead, smart investors continuously bought as prices plummeted. It may feel counterintuitive to throw money into a falling market, but what you’re doing is picking up stocks while they’re on sale and buying more units at cheaper prices.
Why investors should avoid looking for a market bottom in wartime
You’re not condoning either side of the conflict by doing this, you’re simply relying on the fact that all wars eventually end. That way, when prices inevitably rebound, you’ll be able to participate in the upside.
The war in Iran is expanding with no clear ending in sight, but it’s important to remember that the world’s economy extends far beyond the countries involved in the conflict. While all stock markets took an initial hit as the world reacted to the outbreak of the war, the eventual recovery will be uneven, with winners and losers emerging by region.
The immediate economic impact of this war has been a spike in oil prices owing to the closing of the Strait of Hormuz, which is cutting off up to 20 per cent of the world’s oil supply. Gold has also rallied as a traditional safe-haven investment. Interestingly, Canada is a major producer of both and is benefiting, with the TSX still positive for the year and outperforming the S&P 500 by about 5.2 percentage points.
This is an example of how regional geopolitical events can have uneven effects on the world’s economy, and reinforces the importance of geographic diversification as a hedging strategy.
Rather than rush into cash, investors should make sure their equity allocations are spread around the world, including the United States, Canada and international stock markets, and if they can afford it, buying more as stocks dip.
By using the same tried-and-tested strategies that have worked in previous conflicts, we can protect our investments even as the world grows more uncertain.
Kristy Shen and Bryce Leung retired in their 30s and are authors of the new book “Parent Like a Millionaire (Without Being One).”