- Geopolitical tensions are rising as North Korea seeks to ramp up its nuclear capabilities
- Typically, geopolitical conflicts have a short-term impact on markets
- Investors who are sensitive to volatility may want to consider steps to protect against risk
Geopolitical tensions are often a concern for investors. In recent months, such risks have risen significantly due to North Korea’s efforts to ramp up its nuclear capabilities. The general consensus is that there are no easy solutions, and investors are likely to see periodic bursts of headlines about this situation for months to come — if not longer.
It is important to remember that geopolitical conflicts typically have only a short-term impact on markets.
A temporary distraction
Because the situation with North Korea tensions could play out over time, investors should be prepared for the possibility that episodic shocks may temporarily lower stock prices. While such geopolitical tensions may create heightened volatility, they typically have little to do with investment fundamentals — and it is fundamentals that should be our focus.
The tragic terrorist attack of 9/11 is a prime example. Stocks fell dramatically in the wake of the attacks, with the S&P 500 Index dropping more than 10% over the course of a few trading days. However, within approximately a month of the attacks, the S&P 500 Index had returned to pre-9/11 levels, demonstrating the resilience of the stock market.
Key risks to consider
Although geopolitical conflicts tend to follow the same playbook, every situation is unique. In regard to North Korea tensions, further deterioration in its relations with the U.S. could result in stock market sell-offs as well as a rise in prices for “safe haven” assets such as U.S. Treasury securities and gold.
In addition, the situation could possibly affect business sentiment in Asia. In Japan, the Index of Leading Economic Indicators recently moved lower for the first time in four months, which may be a result of growing tensions with North Korea. The concern is that a continuation of this trend could result in reduced corporate spending, potentially derailing economic growth. While the risk seems reasonably remote, it is one that bears watching.
Investment strategies to consider
In this environment, investors — especially those sensitive to volatility — may want to talk to their advisor about potential steps to protect against downside risk without sidetracking efforts to achieve long-term goals.
Discuss with your advisor ways to ensure that your portfolio is well diversified, with adequate exposure to a wide variety of investments.
You may want to include dividend-paying stocks that have historically offered lower volatility. As you and your advisor explore ways to position your portfolio for market uncertainty, you may also want to consider alternative strategies that historically have a low correlation with stocks — such as commodities and real estate. Other alternative investments to consider are those that have the ability to take “short positions,” which can profit even when asset prices fall. Talk to your advisor about strategies that are most suitable for your goals.