Finance expert warns investors not to panic about geopolitical events

The managing director of a Yorkshire financial services firm has warned people with investment portfolios not to make fear-driven decisions about their funds because of panic around the unstable geopolitical landscape.

Shaun Wood, managing director of Leeds and Huddersfield firm Simpson Wood Financial Services, says that when the world’s political landscape is as tumultuous as it currently appears to be, it can lead to people selling their investments, because they are driven by a fear that they will ultimately lose money in the long run if continuing instability leads to a drop in share prices.

“It’s entirely understandable that people would feel nervous around events such as the current situation with the US and Ukraine,” said Shaun, “and that this would lead to worry about the potential financial impact to them personally.

“But panic can lead to people making quick decisions and they then sell stock unnecessarily. As day-to-day prices fluctuate, it can seem as though there is more risk involved, because of the turmoil, than there actually is. What’s always important is the state of the fundamentals.”

The fundamentals of the stock market refer to the basic, underlying markers that determine the health and stability of a company and, by extension, its share price. These markers include elements such as revenue generation, levels of profit and debt, the company’s overall rate of growth and their projected turnover and profit for the year ahead.

“When I say to clients, ‘the fundamentals are solid’ what I mean is that the expected earnings across the whole region, index or economy are good.

“Wars and conflict give the impression of volatility, and there’s no question that people feel this very deeply on a personal level, but history shows these events are not what lead to changes in the fundamentals or market crashes. And it’s those fundamentals to which we should be paying the most attention.”

Stock markets such as the London FTSE 100 and the S&P 500 are notoriously highly reactive to world events, especially when those events appear to potentially threaten economic or national security. Threats such as war or escalating diplomatic tensions can disrupt supply chains, cause spikes in the energy markets and lead to greater uncertainty around trade. This can impact inflation which might, in turn, impact the stock market and lead to concerns about interest rates.

“The reality is that it isn’t these kinds of events and short-term fluctuations that cause crashes,” said Shaun.

“In the worst cases, the panic can itself cause problems, because if everyone panic-sold rather than employed a wait-and-see approach, a crash could be triggered due to assumptions that there are issues when there are none.

“And even if we avoid the worst-case-scenario, it can still lead to those individual investors missing out because the response implies that, really, they’ll only be willing to re-invest at a point when they feel comfortable. Typically, this is not a strategy that leads to decent growth and return on investments.”

Historical data shows that investing during periods of international conflict can actually lead to high yields and positive returns. An analysis by J.P. Morgan Private Bank examined 36 major conflicts since 1940 and found that, on average, the S&P index fully recovered within 47 days after an initial decline caused by fear and instability and that, with sensible and timely management, investors benefited from market rebounds in the months following the initial disruption.

“As we can see from this, more often than not, it’s unwise to be reactionary based on external markers,” said Shaun. “Yes, you’ll miss the (very unlikely) crash, but you’ll miss all the growth too, and that’s not the outcome that good investing can and should lead to in the long run.”