How to Invest Peacefully in a Chaotic World

As Russia begins its blitzkrieg against Ukraine, my inbox is flooded with reports from investment firms about what you should do next—buying consumer-major stocks, selling European and Taiwanese stocks, buying oil tankers or palladium, selling bitcoin. Buying Gold, Selling Bonds.

Remember, though: just a few weeks ago, especially in Europe, a lot of politicians thought the fears of invasion were high. In the markets too, many professionals thought the outlook was clear, confident that the Federal Reserve would act to tame inflation by raising interest rates by 0.5 percentage points in March.

Russia’s aggression has crushed such certainty; In a war-torn world, the US economy may be too weak to withstand major increases in rates.

Now that the conflict has sent oil prices closer to $100 a barrel, investors are suddenly convinced that the Fed won’t be able to take decisive action against inflation. They may be right, at least for now. But what the Fed does is rarely a foregone conclusion, no matter how strong the consensus in the market is.

This is because no one out of the blue can account for the geopolitical bolt.

At its meeting in August 2001, the Federal Open Market Committee, the Fed’s rate-setting panel, indicated that it would begin raising rates “relatively soon”. Then came the September 11 terrorist attacks, and the Fed cut rates by 1.5 percent. Points in less than two months.

As I warned in January: “Investors who overhaul their portfolios based on the likelihood of the Fed doing so could be stuck if it does something else entirely.”

Many professional investors have shuffled their holdings in recent months to capitalize on what the Fed perceived as an inevitable impending rate change. I expect that, when this year ends, some bond funds that have made such aggressive bets will report poor results.

This points to one of the important advantages of individual investors on Wall Street, though you have to be careful not to take it away. Unlike professionals, individual investors are not required to act on their own forecasts. They don’t even have any. This may seem like a weakness, when in fact it is a strength.

Now that Russia has invaded Ukraine and sentiments are heating up, it can be tempting to exit the market to safeguard your money, if you’re feeling intimidated—or seem like a sure thing. Have to bet on, if you’ve been feeling aggressive. But hasty decisions are often wrong, and big hasty decisions almost always happen.

You can try to restructure your portfolio to profit from a scenario that might unfold after an invasion of Russia, such as a boom in US exports of natural gas, or rising inflation and high military spending.

The risk, however, is that scenarios that are likely to materialize often don’t materialize—and, even if they do, they can become very popular, eliminating bargain prices that yield better returns over time. Huh.

Some things are close to certain.

One is when you fear it’s a bad idea to overhaul your portfolio. The time to become more conservative is when things are going well, not when the world seems to be falling apart.

The second is to consider embracing the wonder rather than running away from it.

Would you be surprised to hear that even after yesterday’s 4% dive, European stocks have fallen less than US stocks this year? This amazes me.

The iShares Core MSCI Europe exchange-traded fund, which holds stocks in more than a dozen countries there and has an eighth of its total assets in Germany, is down 11.2% so far in 2022. That’s less than a 12.3% drop in the S&P 500.

In times of geopolitical turmoil over the past half century, global stock markets have tended to adjust, says Elroy Dimson, finance professor at Cambridge University’s Judge Business School. Simply put, when things go bad, almost every market turns red at once, as they did for most of this week. This can make global diversification ineffective in turbulent times.

But stocks around the world haven’t fluctuated in lockstep for long, going their way again in periods of calm, he says. This can reduce risk and makes global diversification worthwhile.

Since US stocks are nowhere near cheap by historical standards, this may be an opportune time to increase your investments in foreign markets.