What’s geopolitical risk and how does it affect your portfolio?


Globally, we’re all connected!!

Six degrees of separation is the idea that all people are six, or fewer, social connections away from each other. This means that one “friend of a friend” statement can be made to connect any two people in a maximum of six steps. However, when we discuss the interconnectivity of the financial markets and investor sentiment across the globe, we may be much closer to one another. And in an increasingly interconnected world, investors face heightened risks from the geopolitical landscape.

Global headlines may create investor uncertainty

There are big global headlines every day, from US-China trade talks, to Brexit-related issues involving the UK and Europe, to risks around North Korea. Some of these can be unnerving or create a chain of uncertainty around the world. As a result, many of these issues affect the stock and bond markets on a daily basis. Why have global issues become more important for investment portfolios, and how can investors respond?

Access to foreign markets allows greater options

Financial markets are more connected than ever before because many investors can now invest globally. Only a couple of decades ago, it was difficult for investors to access the investment opportunities of countries beyond their own. Today, with increased globalization, new financial products, and improved technology, it’s possible for investors to buy or sell securities in almost any market in the world.

Investors can pick and choose where they invest. This means that assets around the world have more diverse owners than ever before. This has increased the connectedness of financial markets globally, since any given stock or bond can, for the most part, be owned by anyone, anywhere.

Companies face increased global pressures

Companies that issue stocks and bonds today can’t simply operate and compete against only their neighbors. Instead, they need to be aware of, and respond to, global pressures. The extent of this pressure certainly varies from industry to industry, but the fact remains that companies are more sensitive to global events than ever before.

What does this mean for investors?

Daily headlines on geopolitical events now play a much larger role in financial markets. In the past, a discussion of investing may have focused exclusively on the performance of individual companies. Today, it’s important to understand the global economic landscape as well.

Does this mean investors should react to every headline and event?

Of course, the answer is no – after all, much of this is simply noise. Just like some “friend to friend” statements may be exaggeration and hyperbole, so too are many financial headlines. True long-term investors – those who are investing for financial success over the course of years and decades – can afford to see past day-to-day events in order to achieve investment gains in the long run.

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