International Diversification: Reducing Geopolitical Volatility

Geopolitical events that generate headlines can often move markets for short periods of time and alarm investors.

Yet over the long term, most events will likely come to some kind of resolution and fade from the news cycle. Over many years, geopolitical turmoil actually tends to have little impact on a portfolio, especially one that incorporates holdings from a number of different geographic areas. One way to help protect your portfolio against losses from geopolitical events is to ensure you have ample international diversification.

International diversification is when your portfolio includes assets that have exposure to different regions of the world in order to help minimize risk from turmoil in any one area. Think of it as the geographical equivalent to sector diversification, which aims to spread your risk across various stock market sectors such as Technology, Consumer Discretionary, or Health Care. However, international investments involve special risks, including currency fluctuations and political and economic instability.

When Global Events Rock Markets

Financial news, or noteworthy change in the markets, is often connected to broader general news around the world. For example, during times of political uncertainty such as the threat of war, investors are often uncertain about how those events may affect their holdings.

Frequently in times of crisis, many investors aim for relative stability. For example, some turn to gold, which has long been considered as a store of value and a sort of “inflation hedge.” And while no investment is completely safe, Treasuries are typically viewed as a relatively “safe” asset that provides durability during times of crisis. In general, stocks—and in particular growth sector stocks such as technology, may be shunned by some investors during a more fearful trading environment.

Lately, several global issues have proven to cause hair-trigger-like reactions in the markets. Among the top concerns recently are ongoing tensions between the United States and China regarding tariffs. Each time the news flares up suggesting that a tariff war will escalate, stocks get skittish. And when the headlines hint at a resolution between the two countries, the markets seem to rally.

The stock market has repeatedly proven investors are indeed concerned with global events, from Britain’s decision to exit the European Union to any news on interest rates and inflation. Stocks may tank on any threats of sanctions from one country to another. Instability in any country can easily shake U.S. markets and stock markets around the world as investors flee to more historically stable assets.

All the rapid back-and-forth may have you worried about how to prevent major swings from geopolitical events within your own portfolios. Fortunately, short-term swings from current events are rarely an indicator of how well a portfolio will perform over the long haul, and there are steps you can take to potentially minimize the overall impact.

International Diversification’s Role in Stabilizing Your Portfolio

Portfolios with holdings with exposure to a variety of countries may more easily recover from volatility caused by geopolitical events. Although geopolitical news often affects some sectors negatively, it can also affect other sectors positively.

So, a portfolio that is diversified with several types of international assets have historically had a greater chance of overcoming losses from geopolitical events.

You may not know what events will unfold next, but you can proactively create international diversification in your holdings so that your portfolio may potentially overcome losses in the long run.