Minimizing Geopolitical Risks to Your Portfolio

Written by: Lee Sherman

The stock market is historically resistant to change. Despite that, a recent series of events, first the impeachment of President Donald J. Trump for soliciting foreign interference in the 2020 U.S. presidential election to help his re-election bid, followed soon after by the U.S. killing of one of Iran’s top military commanders and the retaliation of Iran when it launched missiles into a U.S. airbase in Iraq, may have you scurrying for your Xanax. But these are only the most recent geopolitical risks to your portfolio.Consider Russian interference in our elections, trade-wars with China, and Brexit. Any one of these can affect the financial markets.The conflict with Iran, in particular, is especially volatile because it directly affects the price of oil. About 20% of the world’s oil supply goes through the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Indian Ocean.For now, the tension appears to have diffused but in the long term, it could make a difference if strikes by either side continue. As long a there is a threat of war the market will remain volatile (especially the energy market but stocks, currencies, gold and bonds are also vulnerable).So, what can you do in order to protect yourself against these geopolitical risks? For specific advice, you’ll have to talk to a financial advisor but it is possible to protect your portfolio and (as odd as it may sound) maybe even take advantage of these cataclysmic events.

Weather the storm

One tried and true approach to minimizing the risk to your portfolio from geopolitical events beyond your control (or even understanding) is to literally just ignore them. You could even make things worse by trying to respond to them. Many financial advisors recommend this approach to investing, sometimes called “passive” investing anyway. The idea is to minimize the buying and selling of assets by purchasing a representative benchmark, such as the S&P 500 index, and hold it over a long-time horizon. Historically this has proven to be a sound (if not the only) strategy. Such episodic volatility (which occurs regularly) is not enough to affect the larger fact that the world is getting richer and staying the course will most likely ensure that you do as well.In the case of the conflict with Iran for example, it took only an address by President Trump (in which he toned down the rhetoric) to cause U.S. stocks to rise to record highs (while Treasuries fell).

Perform a risk analysis

If you really want to take a more active approach to managing your portfolio, a financial advisor can help you perform a geopolitical risk analysis. In a portfolio with appropriate risk tolerance, you may even be able to take advantage of these shifts to minimize the impact of world events and even achieve an upside. This is the opposite of the passive approach outlined above.The bottom line? Don’t panic. With one major exception, the financial markets have proven remarkably resilient. Your portfolio is likely to do the same.

Related: Are You Prepared for the Next Market Correction?Lee Sherman is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.