How Global Conflicts Influence Individual Investors’ Financial Planning

Wars and conflicts abroad, while they can create short-term market volatility, do not impact the fundamentals of investing.

getty

Recently, I’ve had a lot of investors ask how the ongoing political and economic instability in Venezuela might impact their portfolios. Wars and conflicts abroad, while they can create short-term market volatility, do not impact the fundamentals of investing. Here’s how investors should think about conflicts abroad within their personal financial planning.

Venezuela Focus

Instability in Venezuela could have a significant impact on short-term oil and energy market volatility. Venezuela accounts for about 18% of global oil reserves, so control of the oil reserves changing hands could lead to some global economic uncertainty.

Venezuela is also considered an emerging market, a category that includes Brazil, China, and India. Political upheaval in any major economy, emerging or developed, can cause a short-term fluctuations, though emerging markets tend to be more sensitive to capital flows.

Conflicts Abroad In General

Recent global conflicts, including the war in Ukraine, the Syrian and Yemeni civil wars, the Israeli-Palestinian conflict and ongoing instability in Afghanistan and Iraq, have varied origins and geopolitical dynamics. While these events have resulted in humanitarian emergencies, global political instability, and at times contributed to short-term market volatility, they have not historically had a lasting impact on a globally diversified portfolio of securities.

Conflicts abroad can result in temporary market volatility, inflation and interest rate volatility, depending on the location and magnitude of the conflict.

What Investors Should Do

Investors might be tempted to try to make movements in their portfolio based on what is happening on a global level. I would discourage this, since there is good evidence to support that prices of publicly traded securities reflect all available information already. This means that it’s nearly impossible for investors to gain an edge and outperform everyone else. In my experience, investors who attempt to time the market usually leave money on the table.

Allocate According To Risk Tolerance

Investors should allocate their portfolios in accordance with their tolerance for risk. Your risk tolerance is dependent on four factors:

• Your financial goal for the specific assets you are investing (i.e. retirement funding)
• Your time horizon to that goal, or whe n you’ll need all the funds out (i.e. 25 years)
• Your ability to take on risk, including availability of other assets and other income
• Your psychological willingness to take on risk

If you have a goal like retirement with a long time horizon, a high ability to take on risk, and a high willingness, then you might have an aggressive risk tolerance and be 100% allocated to stocks.

If you have a shorter-term goal like purchasing a home in two years, these are your only assets dedicated to the goal, and you would be upset to see significant fluctuations in that time, you might have a conservative risk tolerance and be nearly 100% in fixed income and cash alternatives.

Because of this, short-term fluctuations wouldn’t matter to the aggressive investor and the conservative investor would not have exposure to volatile investments.

Diversify Broadly

A lot of investors have what’s known as home bias. Home bias means that investors are likely to have a disproportionately high exposure to securities from their home country. We can overcome this by aligning our investment portfolios with world market capitalization. Market capitalization can be found by taking the total amount of stocks outstanding for a company and multiplying by the price of each stock. This indicates that as of the end of 2024, only 65% of our portfolios should be allocated in United States companies, 23% should be allocated to developed nations outside the United States, and 12% should be allocated to emerging markets.

Another thing to note regarding Venezuela is even compared to the size of its economy, the stock market capitalization is low compared to other countries. It accounts for less than .01% of emerging market exposure.

Talk To Your Financial Advisor

Rather than talking to your coworker, neighbor, or family about market speculation, speak to a professional when you’re feeling scared or uncertain. They will likely reassess your goals and risk tolerance, answer questions about what is going on concisely, and dispel misinformation. One of the biggest values in working with an advisor is the behavioral coaching aspect.

Only Speculate With What You’re Willing To Lose

In every time of conflict, I will talk to one or two investors who see it as an opportunity. Once, during an unstable period in China, I had an investor’s son say, “I really think my mom’s retirement portfolio should be invested in Chinese penny stocks because the market is cheap.” While speculation and taking on excess risk could lead to high returns, you could also end up losing everything if you are wrong.

For that reason, I tell investors that they can speculate with a portion of their money once all of the rest of their financial goals are on the right track to be fully funded. Making speculative investments in your only retirement account would not be advisable.

Conclusion

In conclusion, while conflicts abroad, such as those in Venezuela, can lead to short-term market volatility, they do not fundamentally alter long-term investment strategies. Investors should focus on aligning their portfolios with their risk tolerance, diversifying broadly, and avoiding reactionary moves based on global events. Consulting with a financial advisor can provide valuable guidance and help maintain a disciplined approach. Speculation should be limited to amounts one can afford to lose without jeopardizing financial goals.

This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.

Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-7491277.1 (1/26)(exp. 1/30)