Looking Forward
Geopolitical events can often feel dramatic, but when we assess their importance for markets we usually ask a simple question: will this affect company profits or interest rates in a meaningful way? In the case of the conflict involving Iran, it could. One reason is the potential impact on global energy supply, particularly through the Strait of Hormuz, a key route for oil shipments.
How long the conflict lasts will be very important. If it is short-lived, markets are likely to cope with it. A longer disruption could have wider economic effects, especially through higher energy prices.
Both sides say they are prepared for a longer conflict, but each faces limits. Iran already has economic and social pressures at home, and closing the Strait of Hormuz would restrict its ability to export oil. For the United States and President Trump, the conflict could also become difficult domestically, particularly in an election year, as higher energy prices quickly affect households and businesses.
Markets have fallen in recent days, especially areas that had performed strongly earlier in the year. However, we have not seen widespread panic. One possible reason is that investors believe the US administration may change course if the economic cost becomes too high. Some market commentators call this the ‘TACO trade’ – the idea that policy may soften if markets or the economy react negatively.
Another factor is that many investors remember selling at the worst moment during last year’s sharp sell-off around ‘Liberation Day’. As a result, some may be reluctant to react too quickly this time.
That said, this situation still carries risks in the short term. Markets appearing calm could give policymakers the impression that conditions are manageable, even if that calm is partly based on investors expecting policy to change. There is also the risk that the situation escalates further if Iran or its regional partners respond more aggressively.
From an investment point of view, our approach remains balanced. We stay alert to developments but avoid trying to time markets too aggressively. But we are vigilant and we will communicate with our clients is we need to, as we did in 2000 when the pandemic crash happened.
Our focus is always to separate short-term noise from longer-term trends. At this stage, we believe the key themes we have identified over the past year remain in place.
We understand that periods of uncertainty and market volatility can be worrying for clients and their families. If you are concerned about recent market movements, you may find it helpful to note ‘Time in the Market’, below which explains why staying invested is often important for long-term outcomes.
We have been here before and we know what steps are sensible and what is reactive.
From the Desk of Andy Brooks.
As always, if you would like to speak with a member of the team, we are here to help.
Why “time in the market” is usually better than “timing the market”
A common question during periods of market volatility is whether it is better to sell investments and try to buy back later when prices are lower. This is known as timing the market. While it sounds sensible, in practice it is extremely difficult to do consistently.
For most long-term investors, staying invested – often called “time in the market” – tends to produce better results.
Markets move quickly
Financial markets often rise and fall very quickly. Some of the strongest market days happen shortly after sharp declines. If an investor sells during a fall and waits for clarity before reinvesting, they may miss these important recovery days.
Missing just a handful of the best days in the market can significantly reduce long-term returns.
Timing requires two correct decisions
To successfully time the market, an investor must make two decisions correctly:
- When to sell
- When to buy back in
Getting one of these wrong can harm long-term results. Even professional investors rarely manage to do this consistently.
Compounding works over time
One of the most powerful forces in investing is compounding, where returns generate further returns over time. The longer money remains invested, the more this effect can build.
Regularly moving in and out of the market can interrupt this compounding process.
Volatility is a normal part of investing
Market declines are uncomfortable, but they are also a normal part of long-term investing. Historically, markets have experienced many short-term setbacks but have tended to recover and grow over time.
Investors who remain invested through these periods often benefit when markets recover.
A disciplined approach
Rather than reacting to every headline or market movement, a disciplined long-term investment strategy focuses on:
- maintaining a well-diversified portfolio
- aligning investments with long-term goals
- reviewing the strategy periodically rather than reacting to short-term noise
In most cases, patience and consistency prove more effective than trying to predict short-term market movements.