WORLD IS A MESS: HOW SHOULD YOU INVEST?

“There are an awful lot of things going on that need understanding and explanation. To put it mildly: The world is a mess.”

– Former US Secretary of State Madeleine Albright

I can’t begin to tell you how many of my clients believe that we are approaching the end of the world. Well maybe not that extreme, but as the geopolitical situation the world over spins out of control, investors are questioning how best to position their investment portfolio for the global turmoil.

Aside from Israel’s war with Hamas, Syrian genocide, Iranian nuclear proliferation, radical Islamization of Iraq, Russian’s shooting down a Malaysian airliner over Ukraine, massive but little reported human-rights abuses in Venezuela, the sieve that has become the US border and other issues, let’s not forget that the global economy has not rebounded from the financial crisis of five to six years ago nearly as strongly as anticipated. Throw in daily headlines about how the US stock market is so high a crash is imminent, and it’s no wonder that investors are nervous.

Stay the course

My advice: Do nothing. Just stay the course and follow the investment plan that you have created. 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 who 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 that was used to try and profit from the events dropped anyway.

Let’s look at the local Israeli market as a perfect example.

With the intense fighting over the past several weeks, two-thirds of Israelis spending time in bomb shelters and productivity at work rather low, conventional wisdom would indicate that the Tel Aviv Stock Exchange would drop significantly and the shekel would get hammered. Go figure, but the TA-25 index is up since the beginning of the war and the shekel has strengthened. The exact opposite of what any sane person would have thought would be the outcome.

The same thing happened during the Second Lebanon War.

Market crashes generally happen without warning, and they are not usually telegraphed.

Retirement investors 

While I believe that most investors should just stay the course and do nothing, retirees are different. For retirement investors who don’t have a large net worth and can’t afford the possibility of a 20 percent to 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 two reasons: No. 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 No. 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. If you are worried that the cumulative effect of all these events portend an imminent market crash, than just sit in cash and take a wait-and-see attitude. I don’t believe that it is necessary to try and profit from a potential market drop, because if you are wrong, you are going to lose money, and that’s precisely why you sold your stocks in the first place. No need to be a pig, just have some patience and then reinvest.

It will drop

Let’s say you disagree. Now what? For those investors hellbent 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.

Options can be quite complicated and should be understood before being used. If you are worried about a market decline, speak with your financial adviser to coordinate how best to position your portfolio.

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 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, SIFMA. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il