Investing in times of war: a smart idea?
Everyone is confronted with great unrest on a global level these days, including investors. There are various war zones spread across the world, stock markets are falling sharply and inflation is still rising. This seems to lead to the conclusion that this is not the most favorable time to start investing. This often turns out to be quite possible. But how then to invest in times of war ?
Many novice investors are now confronted for the first time with a potential threat to their investment portfolio. How do you deal with this as an investor? And to what extent were stock prices previously subject to wars?
Emotion is by far the biggest danger in investing
For an investor, the war itself is not the great danger, but the panic that it causes. The result is that decisions are made based on the emotions that have arisen. Take the situation in Ukraine, for example: In our country, little has changed in our daily lives (apart from the fact that the prices of gas and petrol have risen considerably and that inflation is well above the average of recent years), while the population of Ukraine has to defend itself against the invasion and fears for its own lives. Is it really necessary to let the Russian authorities scare the living daylights out of you? The answer is no: as an investor, you would be wise not to let yourself be carried away by emotions.
It was Buffett who started buying stocks right after Pearl Harbor in 1942. With the sole intention of buying stocks when they are cheap, he did not let the world’s problems stop him. Logical, you would think. Many investors act differently, because they are guided by fear. Fear of a possible recession, war, difficulties in the financial sector, and so on. This causes a boom in the sale of stocks, regardless of the price they receive for them.
Refrain from news reports
Wars are a true source of nourishment for the news sector. When war is trending, we are faced with an incessant stream of news reports. This is because everyone wants to follow the news closely and the news channels are watched en masse. The media naturally jump on this with the current news, preferably as directly as possible. We then also see the repercussions of this with the investor. The danger for investors lies in the fact that they
project the bad news onto their own trading on the stock exchange. It is undeniable that the war in Ukraine has far-reaching consequences for the global economy with certain sectors in particular, but it is not the case that the stock exchanges should be a direct reflection of the troubles between belligerent leaders.
As an investor, you should focus on clear signals and ignore much of that additional news. It is advisable to pay particular attention to the economic factors. Therefore, limit the news to background analyses and closely monitor the interest rate on the bond market. In addition, keep a close eye on the development of the purchasing managers’ indexes (PMI). An investor benefits more from economic reality than from sensational news reports from the war regions.
Ultimately, what an investor should focus on is the operational and therefore also the financial results of the companies in the investment portfolio.
How should you act as an investor?
The question that now arises is whether war should be a reason to renew your investment strategy. Changing your financial planning is certainly not an option if there are no changes in your personal situation. Here are five tips for investing in times of war.
Tip 1 – Keep calm: a wise lesson from the past
It is well known that fear is a bad advisor, especially in investments. Investors with little experience tend to react to the emotional short-term behavior in the stock market world. When such an investor is confronted with large losses, he or she has difficulty coping. Experienced investors, on the other hand, are used to the fact that fluctuating stock prices are the order of the day and follow their own course. Stock market history shows that cashing in on shares is certainly not a wise decision and that it subsequently leads to loss of wealth.
A wise lesson from the past is that the impact of wars and other shocking world events is limited. Geopolitics ultimately only produces a short-lived reaction on the stock exchange floor.
Tip 2 – Don’t wait for a more favorable moment
Good timing of the stock market is not feasible. Prices are often unpredictable. The average saver is inclined to postpone financial investments for a while when there are major events on the world stage. In practice, this has the wrong effect. Stock prices change quickly as a result of new news. If there is light on the horizon, the stock markets immediately open higher and you enter at higher prices. The effect is that the profit is lower.
If you want to focus on reducing risks, choose periodic investments. With this form of investment, you reduce the risk of bad timing of the market, because with a spread of the entry moments, the purchase price is averaged. Read more about periodic investments .
Tip 3 – Faithfully follow the chosen investment strategy
The basis of successful investments is a well-chosen investment strategy, especially when times are less favourable. The starting point for investing is often the return in the long term. In an investment plan, you set the duration and the desired risk of your investments. The advice is to stick to the set course for the long term, since trading in the short term can entail considerable risks.
The way things are going on the stock markets today is a useful test of your personal stress level. It is the perfect time to evaluate your chosen risk profile and associated stock market strategy. What is your reaction when price falls actually occur? Do you not dare to wait for the further course of events? Based on your experiences in stressful times, you can decide to change your investment profile and limit the risk.
Tip 4 – Go for long-term investments
In the short term, you regularly have to deal with fluctuations (falling) and losses, which then recover in the period after. This can happen within a few weeks, but it is also possible that it takes many months before the prices go up again. An example of this is the stock market crisis of 2008. An investment period of ten to fifteen years is the most ideal. The chance that your investments will yield a return is then much greater, because there is ample time to compensate for any losses. As you get closer to your set goal, it is wise to limit the risks of your investment portfolio.
Tip 5 – Choose a broad spread of your investments
Setting up your investment portfolio in such a way that you play it completely safe is an illusion. Investing mainly comes down to good diversification. This not only distributes the risks of the chosen investment categories and financial products, but also of the regions and sectors. Do you come to the conclusion that you have focused too much on one component? Then it is wise to adjust your portfolio further and implement a broader diversification, for example with the help of various providers of investment products and with a variety of investment forms. Please note that you do not immediately sell at a low price. It is better to expand your investments, at least if you have extra cash. This will ensure that the average purchase price is lower.