As originally appeared in The Jerusalem Post on June 8, 2017.
Political language… is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind. -George Orwell
The world has gone mad. Terrorist attacks throughout Europe, the move to bring down US President Trump, UK elections, Saudi Arabia taking a tough stand against Qatar, the horror that has befallen Venezuela. Who would ever imagine that Israel has turned into an island of tranquility! Investors are jittery and wondering how all of this geo-political chaos will impact their investments.
How to proceed?
I have received numerous calls from clients over the last month or so asking if they should sell out their investment portfolio and sit in cash until the craziness passes over. The first thing I always remind people is that the world is usually a pretty crazy place with wars being fought in multiple countries, and plenty of political intrigue As such my advice is to do nothing.
Both readers of this column and listeners to my podcast will not be surprised by this advice. I always preach that panic is one of the worst things an investor can do. It’s important to stay the course and follow the investment plan that you have created. To repeat: The world has always been a very dangerous place; pundits have always been calling for market crashes, and most of the time the market moves higher. I have had many clients over the years that try and maneuver their portfolios based on political events and how the anticipated events would play out. More than once the client was correct in the prediction but the portfolio used to try and profit from the events dropped anyway.
Let’s look at the US and global markets as a perfect example. With all the aforementioned issues common wisdom would have predicted a huge market drop. What has actually happened is that markets have moved higher and any drop has been short-lived and not particularly serious.
It’s important to note that historically market crashes generally happen without warning, and not usually telegraphed.
While I believe that most investors should just stay the course and do nothing, retirees are different. For retirement investors that don’t have a large net worth and can’t afford the possibility of a 20-30% loss, pragmatism should win out. For these investors, we may be entering a period of time where capital preservation takes precedence over capital appreciation and they should make some changes in the way their portfolio is allocated. I say this for 2 reasons. 1- They don’t have the luxury of time on their side and the ability to rebuild their wealth in the event of a market drop and 2- because the most important aspect to investing is being able to sleep well at night and not be nervous that a sudden market drop will wipe out your savings.
For these investors, it pays to lower stock exposure. It also means that they probably have a more aggressive portfolio in general than they should have. As I said, markets can drop anytime and 10-15% drops are common, and if you don’t have the ability to weather that storm, you have no business having so much stock exposure anyway.
It will drop
Let’s say you disagree and think that you can accurately predict the market drop. Now what? For those investors hell-bent on trying to time a major market drop and profit from it, the classic way to play a market drop is by buying ‘put’ options. A ‘put’ is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. A ‘put’ option is basically a bet that the market will drop. If it does, the investor makes money. If wrong, the initial investment in the put is lost.
If you are worried that geo-political events will cause a severe market drop than now is the time to speak with your financial advisor to make sure you have the proper asset allocation for your risk level and long-term financial goals.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email email@example.com.