Our Blog Aug 03, 2017
Big events can stir up market volatility, but it’s often short-lived. How can you tell if an event will trigger sustained change? Ask these three questions.
Major news stories often elicit an emotional response, whether it’s worry about a recent government decision or sympathy for people in crisis. But when it comes to investing, emotional reactions to a consequential event can cloud our judgment.
Most big news events don’t have a large effect on the global economy, even if they are a cause of significant turmoil, but some do. If you’re unsure if you should make an adjustment to your portfolio based on a geopolitical event, you can ask yourself three questions. If the answer is yes to any of them, there may be a longer term effect on asset values. But if the answer is no, the news story — and its effects on your portfolio — will most likely pass.
If a global superpower is involved or has the potential to be quickly drawn into a situation, there’s potential for longer term concern. Similarly, if it looks like a conflict could escalate quickly and ignite involvement from several other countries or if political tensions trigger a significant loss in consumer confidence, it’s possible we’ll see sustained changes in the market.
Oil is the most important commodity in the world, providing fuel that keeps industry and transportation systems moving and whole economies growing. If there’s risk of a significant disruption to energy supplies because of war in key oil-producing regions or because oil supplies have been blocked at a critical choke point, then prices could spike upward. Any sustained increase in oil prices is likely to drive down economic growth through a combination of lower corporate investment, consumer confidence and higher inflation, possibly having longer term effects on investments.
We should be aware of geopolitical risk and vigilant of the latest breaking news. But we also need to know when to react and when to sit tight and wait out what is most likely to be a short-term spike in headline-fueled volatility. Having a solid investment plan in place will allow for shifts in approach when market conditions change. And using these three key questions to evaluate a recent event can help avoid making emotionally driven investment decisions in reaction to temporary volatility.