In times of trouble, investors instinctively race off in search of safe havens, and that is exactly what happened after President Donald Trump ordered the killing of Iranian general Qassem Suleimani in Iraq.
Run for cover
Cue a spike in the price of gold, the crypto-currency Bitcoin, and the Japanese yen. All are seen as financial boltholes in their different ways – gold is an ancient store of value, Bitcoin offers shelter when traditional assets are under pressure, and the Japanese yen is a rock solid currency because of the country’s solid current account surplus.
By contrast, investors flee stock markets when geopolitical problems strike. The FTSE 100 ended Monday down 0.64%, while the FTSE 250 was off more than 1%.
The US-Iran stand-off scared away short-term traders; they will wait to see how and when Iran will retaliate, and whether it does something drastic like attempt to close the Strait of Hormuz to shipping. Almost a fifth of the world’s oil passes through the Strait, some 17.2m barrels per day, and closing this could inflict further turmoil on markets.
The uncertainty isn’t hitting every stock, though. As Brent crude shot through $70 a barrel, FTSE 100 oil giant BP climbed more than 2% on Monday, while FTSE 250 listed energy services business Wood Group jumped almost 4%.
Play the long game
Stock market traders are by nature a jumpy bunch, as they try to capitalise on short-term market movements, but investors must ignore short-term threats, whether economic or geopolitical, and keep their eyes on the long-term prize, which is to tap into the greater long-term growth capacity of stocks and shares to build wealth for their future.
If you are investing for 20, 30, 40 years or more, events like these will one day be a mere blip. You need to keep your money exposed to the winning combination of share price growth and in particular, dividend payouts, and ignore political noise like this.
It’s time in the market that matters, not timing the market, as the old investment saying puts it. Any investor who is so nervy that they sold off their holdings because of recent political events probably shouldn’t have been in the market in the first place.
Home from home
The unpredictability of stock markets was seen in 2019, when investors started the year in a gloomy mood and ended on an unexpected high. The FTSE 100 ended last year more than 10% higher, while in the US, the S&P 500 index climbed more than 25%.
Markets may struggle to repeat the trick this year, so I would advise looking for buying opportunities in the shape of a market dip. Who knows, we may see one over the next few days.
If further geopolitical uncertainty does knock investor sentiment and share prices, I would forget gold, Bitcoin, the Japanese yen, the Swiss franc and cash. Despite their vaunted ‘safe’ status they don’t cut it for me in the longer run.
Screw up your courage, and buy shares instead. In the longer run, they should deliver a far superior total return, which makes them a far better home for your long-term wealth, whatever happens on the political stage.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.