Tension with North Korea

On 8 August 2017 Donald Trump threatened North Korea with ‘fire and fury’ after its missile tests. Gold rose and stock markets fell for several days. The verbal escalation between the two countries, in a context of repeated military tests, made markets fear a deterioration of the situation in a region that is key to the world economy and generated high-impact headlines during the week. At such moments news follows news quickly and it is easy to lose perspective.

For savers and investors, the succession of news in a warlike tone raises an uncomfortable question: how to react to a threat that may or may not turn out to be real. The markets’ response was the usual one in such cases, and it is worth understanding it so as not to be dragged along by it. What moves in these days is not only the value of companies but the degree of fear among participants. And fear, unlike a company’s profits, can change from one day to the next.

How markets react

Geopolitical tensions raise uncertainty, and investors tend to look for assets they see as safer, such as gold. At the same time, they tend to sell riskier assets, such as shares. These are short-term moves that reflect fear more than changes in fundamentals. When the threat loses intensity, prices tend to recover part of the lost ground, although not always, nor immediately. Reacting in the middle of the nervousness is usually worse than waiting for the picture to clear.

A safe haven is an asset bought not for its expected return but for the confidence it inspires in moments of crisis. That is why its price rises when there is fear and may fall when the fear dissipates. Understanding this logic helps in not interpreting the movements of a few days as permanent changes, and in not turning a passing scare into a long-term decision.

Noise and signals

Not every headline carries the same economic weight. Telling a one-off episode of tension from a lasting change in the environment is hard in real time, which is why hasty decisions tend to be poor advisers. Recent history is full of episodes that seemed decisive at the time and that, seen from a distance, barely left a mark on the trajectory of the economy.

This does not mean that geopolitics is irrelevant, or that no conflict can have serious consequences. It means that, in the face of uncertainty, the best defence is not to guess how things will turn out but to be ready for several outcomes. A person who has thought in advance about how they would act in a sharp market fall is in a better position to keep calm when it happens. That mental preparation is part of the plan, just as much as the figures.

The importance of a plan

A diversified portfolio, with a clear horizon and some liquidity for the unexpected, is designed to withstand episodes like this without forcing a sale at the worst moment. Liquidity serves an essential function: it avoids having to sell assets at low prices to meet an unexpected need. It is the cushion that gives peace of mind when everything else is moving.

If a fall causes excessive worry, it may be a sign to review, with an adviser, the level of risk being taken: perhaps the portfolio does not match its holder’s real tolerance. It is better to make that review calmly than to react under pressure. This text is general information and not investment advice; each person must decide according to their own circumstances.

A week’s fears rarely justify changing a plan made for years.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.