Opinion

James Saft

Don’t ‘war game’ your portfolio

August 28, 2013

By James Saft

(Reuters) – Investors fearing the impact of an attack on Syria ought to start worrying instead about things they can predict and control.

In other words – and with apologies to Nathan Rothschild, whose advocacy of buying during times of war is probably apocryphal anyway – don’t “buy when there is blood in the streets,” hold.

Global markets have been roiled in recent days by a rising conviction that the United States will lead military strikes against the Syrian government in reprisal for its alleged use of chemical weapons on its own people. Emerging market assets were hit hard again on Wednesday, while Brent crude oil hit a six-month high of $117 a barrel. Gold also rose, and U.S. stocks, which had fallen on the theme on Monday, recovered a bit of ground.

The news from Syria, wracked by a civil war, is and likely will continue to be tragic, but for the vast majority of investors by far the smartest thing to do is nothing.

Strikes on Syria very likely will happen, and very likely will have mild to moderate impacts on a variety of asset markets, but you, dear reader, are highly unlikely to get rich trying to figure out how or why.

Let me be clear: I am not saying leave politics to your elders and betters. Obviously, citizens of the countries involved have a right and obligation to form opinions and take positions on these things. What they probably ought not to do is take risks for themselves and create fee income for financial services firms by putting those opinions into investment practice.

First off, the way events will unfold in Syria is far from simple. The basic rolling news headline narrative – oppressive regime, faced with existential threat, commits atrocity(ies) and is bombed or faces no-fly zone by allies led by U.S. – is pretty straightforward. How that plays out, however, is very complex, and the aftereffects even more so.

If we examine some past conflicts, we might think we have a template of how to “play” Syria. Looking at the 1991 Gulf War, Kosovo in 1999, the invasion of Afghanistan in 2001, the invasion of Iraq in 2003 and Libya in 2011, we can make some generalizations. The S&P 500 tends to sell off ahead of conflicts but recovers once they start. Oil tend to rise in the runup, and sell off on the news or just before. Gold sometimes rises ahead of fighting and usually sells off when it begins. The dollar tends to divert from whatever its trend was before the idea of conflict arose, and reverts to that trend once shots are fired.

THE FIRE THIS TIME

Well and good, but if you seriously want to put your retirement and future wealth at the mercy of these types of trends holding true you are, again, either hugely overconfident or slightly desperate.

As Kenneth Lam, a markets strategist at Citigroup, points out, this time may be different.

“Syria is arguably more complex than these previous conflicts. Military objectives are also not as well defined. Russia and Iran will also weigh in both pre- and post-action. The usual market reaction may be more muted and short-lived because of greater uncertainties,” Lam wrote in a note to clients on Wednesday.

Michael Wittner, oil analyst at Societe Generale, argued on Wednesday that oil could surge to $150 per barrel if the conflict affects important oil producers such as Iraq, in what would be a departure from the pattern in recent past conflicts.

Make no mistake, if this happens it will be a big deal. Emerging markets, which are facing their own potential funding crunch, particularly don’t need high oil prices or a shock to the financial system just about now. We could easily see an emerging market selloff on oil turn into a selloff in developed markets.

But the fact that something might affect the value of your portfolio, even severely, is not the same as saying you would be wise to bet on that possibility, other than living your life in such a way that swings in asset prices don’t leave you vulnerable to a personal financial crisis.

That, however, is best done by managing your liabilities and outgoings rather than playing a game of Battleship with your portfolio.

In fact, the only positive step I would recommend is to put off rebalancing your portfolio if we get a big selloff just before you had planned to pare back assets that have performed strongly in favor of those that have done less well.

The vast majority of investors simply haven’t got the ability to reliably call war markets correctly. If they want to avoid being a casualty they are better off sitting this one out.

(At the time of publication, James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)

(James Saft is a Reuters columnist. The opinions expressed are his own.)

(Editing by Douglas Royalty)

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