King of The World
Your Money, Your Brain, and War
I know this topic is on our clients’ minds. It is true that not a single client has called me, and at the same time I know it is on their minds. I saw a Xwitter Spaces the other day (I didn’t listen it, the title alone was enough to show me it was designed to get clicks) by David Sacks: “Israel-Hamas: Could this be the start of WW3?” My guess is that it attracted many thousands of listeners. We see the media every day, with all kinds of real and fake news being sent out. It gets views. Our brains are attracted to disasters - we want to avoid them - it’s how we are wired.
Presuming this is the start of WWIII (to be clear, I do not believe this), are there actions you can take now that will make you financially safer or wealthier?
We might as well entertain ourselves while we think about this, so this week’s music includes Steely Dan, Captain Beyond, George Harrison, and Aerosmith. I am taking a break from social commentary this week. I feel like I occasionally need to focus on my profession.
Market History and Major Events
The data says no. This is highly unlikely to be the end of the world. Here is an analysis from LPL Financial. The Pearl Harbor attack, which forced the US into World War II (over much “America First” protest, by the way… sounds familiar), did, as I think we would all expect, disrupt the S and P 500 Index. For 307 days.
For reference, let’s take a look at other market declines (in financial advisor parlance, these are called drawdowns). You can see that the “Tech Crash” had a recovery period of about 7 years. The “Great Recession”? About 6 years to recover.
Fight or Flight?
We absolutely are fearful of a spiraling, worldwide conflict. Our brains are predisposed to do so. Who is next in? How much does it escalate? For how long? We have speculation and we have what appear to be tagalong events and we know that Hezbollah and several countries support Hamas. There is no easy solution to finding a Palestinian homeland that also provides for security for the Jews and Israel. This is no simple problem. The stress and fear we feel are compounded by our own challenging relationships with Russia, China, North Korea, Turkey, Iran, Iraq, Saudi Arabia, and Egypt, among others, which adds fuel to the fear fire.
It’s useful to ask who would benefit from a world war. We might also ask ourselves who might survive a world war, given our weaponry and who is leading the various countries. The answers to these questions are most likely the limiting factors and why the Hamas terrorist attack, heinous as it is, and the necessary response from the Israelis, which, combined, are a massive human tragedy, are unlikely to trigger a global conflict. Is there a probability that we have a global conflict? There is, of course, as there is almost no event that is impossible. The same thought processes and questions apply to the Ukraine, which seems to have become a ho hum kind of event to much of the world’s population. There is great suffering and human tragedy there, too. However, it is a good and recent example of just how little wars affect the global markets. And at least as regards the US markets, the exposure for most US equities, assuming this war stays relatively local, is fairly small, as noted in this article.
So the fight mechanism, in this instance, is to stay invested. Fighting, as an investor, means sticking to your investment strategy and personal financial plan when many are fleeing and when you have the least amount of confidence in the future. It means having faith that all things must pass. Going to cash or moving your assets to gold, silver, and/or other commodities means you then have two decisions to make:
When to sell equities and bonds (with potential tax costs).
When to get back in (and this is the most fearful decision of all).
Here is a 30-year comparison of gold (gold line) and the S and P (blue line). The second chart is the 100-year view, so it covers World War II, Korea, Vietnam, 9/11, and other terrorist and war events. The clear “store of value” and “inflation hedge” is the S and P, and this is true of other equity markets as well. Now, is gold less volatile in price and does it tend to rise in value during crises? Yes. And if you hold it for long periods and/or don’t get the trade timing right (virtually no one does) you will have cost yourself a lot of money.
Looking at shorter time spans, gold and silver look attractive. There was a complete mean reversion following the spike from 2009-2013 (during the “Great Recession”. Looking at the data, and understanding that mean reversion is quite common, it’s fair to conclude that we will see mean reversion in gold and silver.
These next two items are from “The Golden Dilemma”, which is research regarding gold and inflation.
Last, looking at inflation-adjusted gold returns since 1969, you made about 3% compounded on your gold holdings. This would double your principal roughly every 24 years. Not terrible. In the US stock market, using the S and P as the proxy, you would have made about 6% in the same time period. This would double your principal roughly every 12 years. $100,000 in gold in 1975 would then become $200,000 in 1999 and $400,000 today. That same $100,000 in US stocks would be $200,000 in 1987, $400,000 in 1999, $800,000 in 2011, and $1,600,000 in 2022. Count ‘em, folks, that is four times more wealth creation.
Would you go broke holding gold? No. Would you be far wealthier holding US stocks? All the history and data tell us so.
Without Question, Fight
Is this the time that is different? It is possible. Is it? No way to know. If it is different, will you, a diversified stock investor, be hurt by taking no action? Also, no way to know. If it is not different, and you take “defensive” action, will you be (financially) injured? Clearly yes, and if that would be material to you, then taking action is highly likely to be a poor move. If you have substantial excess wealth, well, you can be as defensive as you like. You are just likely to have less wealth than you might have, otherwise. A lot less wealth. You may not care. Most people do.
The only conclusion I can draw here is that making investment strategy or financial planning changes during wartime is a financial mistake unless you have cash needs, cashflow issues, or some other material change to either your current needs or future wishes. When your flight mechanism is engaged, do nothing. Doing nothing is hard. It is, historically, immensely rewarding.
I hope this serves you in some capacity. All feedback is a gift.
Sundry:
It is increasingly important to vet what you read and hear. Both the IDF and Hamas, as well as their various supporters and enemies, are quite adept at using the media, social and otherwise, and politicians are, as well, regardless of the facts. I wish I could say the US does not suffer from this malady, and we all know that is not true.
“You don’t have to turn this into something. It doesn’t have to upset you. Things can’t shape decisions by themselves.” ~Marcus Aurelius
Crime kills far more people than war, by the way, per the UN.
As you can tell, I am doubtful that there is much new in this world. True, we are discovering more and more about how our universe and our brains work. The behaviors, the human actions and reactions? Definitely not new.