By Jason Zweig
Feb. 25, 2022
When the world turns upside down, starkly simple views are reassuring. Yet it’s at those very moments that investors need to be even more skeptical about takes that smack of certainty.
As Russia launched its blitzkrieg against Ukraine, my inbox brimmed with reports from investment firms on what you should do next—buy consumer-staple stocks, sell European and Taiwanese shares, buy oil tankers or palladium, sell bitcoin, buy gold, sell bonds.
Remember, though: Just weeks earlier, plenty of politicians, particularly in Europe, thought invasion fears were overblown. In markets, too, many professionals thought the outlook was clear, convinced that the Federal Reserve would act to temper inflation by raising interest rates 0.5 percentage points in March.
Russia’s aggression has crushed such certainty; in a world disrupted by war, the U.S. economy may be too frail to withstand a big increase in rates.
Now that the conflict has sent oil prices near $100 a barrel, investors are suddenly sure the Fed won’t be able to act decisively against inflation. They might be right, at least for now. But what the Fed does is seldom a foregone conclusion, no matter how strong a consensus forms in the market.
That’s because no one can account for geopolitical bolts from the blue.
At its meeting in August 2001, the Federal Open Market Committee, the Fed’s rate-setting panel, indicated it would likely begin raising rates “relatively soon.” Then came the terrorist attacks of Sept. 11, and the Fed slashed rates by 1.5 percentage points in less than two months.
As I warned in January: “Investors who overhaul their portfolios based on what the Fed seems likely to do could get stranded if it does something else entirely.”
Many professional investors reshuffled their holdings in recent months to cash in on what they regarded as inevitable imminent rate changes by the Fed. I expect that, when this year is over, some bond funds that made such aggressive bets will end up reporting poor results.
That points to one of the critical advantages that individual investors have over Wall Street, although you have to be careful not to fritter it away. Unlike professionals, individual investors don’t have to act on their own forecasts. They don’t even have to have any. That might feel like a weakness, when in fact it’s a strength.
Now that Russia has attacked Ukraine and emotions are running high, it might be tempting to get out of the market to keep your money safe, if you’re feeling afraid—or to bet on what sounds like a sure thing, if you’re feeling aggressive. But hasty decisions are often wrong, and big hasty decisions almost always are.
You could try restructuring your portfolio to profit from a scenario that might unfold in the wake of Russia’s invasion, like a boom in U.S. exports of natural gas, or rising inflation and higher military spending.
The risk, though, is that scenarios that seem likely often don’t materialize—and, even if they do, they can become too popular, eliminating the bargain prices that produce superior returns over time.
A couple of things are pretty close to certain.
One is that it’s a bad idea to overhaul your portfolio when you’re afraid. The time to become more conservative is when things are going well, not when the world seems to be coming apart.
Another is to consider embracing surprise instead of fleeing from it.
Would it surprise you to hear that, even after yesterday’s 4% dive, European shares have fallen less this year than U.S. stocks? It surprises me.
In periods of geopolitical turmoil over the past half-century, global stock markets have tended to move in sync, says Elroy Dimson, a finance professor at Cambridge University’s Judge Business School. To put it bluntly, when things go bad, just about every market turns red at once, as they did for much of this week. That can make global diversification seem ineffectual in turbulent times.
But stocks around the world don’t fluctuate in lockstep for long, going their own ways again in calmer periods, he says. That can reduce risk and makes global diversification worthwhile.
With U.S. stocks nowhere near cheap by historical standards, this might turn out to be an opportune time to increase your exposure to overseas markets.
Write to Jason Zweig at email@example.com
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