What you may want to consider—and what you may want to avoid doing
Stock markets reflect the beliefs of the people who participate in them about the future of companies’ earnings while bond markets reflect bondholders’ beliefs about how likely they are to get the interest and principal payments they expect. Professional investors know this and act on what they know, which includes recognizing that wars have historically had little influence on markets.
Sometimes, though, individual investors may get caught up in the emotions that media coverage of war can inflame. Ominous headlines and graphic images of death and destruction may stimulate a response from investors of “I need to take action” who lose sight of which events influence markets, and which do not.
Sometimes a strongly felt but inappropriate impulse to “do something” could prompt an emotional investor to sell stocks and bonds and retreat to cash, which they may hear described as a “safe haven” in times of war.
But history says that would be a mistake. Some of the best days in the stock market have historically occurred during bear markets. “What we’ve seen historically is that investors who give themselves a time out of the market very rarely come back in at the right time,” says Naveen Malwal, institutional portfolio manager with Fidelity’s Strategic Advisers LLC. “Negative headlines can persist for some time. Investors typically wait for good news and by the time that happens, they’ve often missed some of the strongest days of market performance.” Missing out on those big days can make a significant difference in your long-term return. As the chart below shows, a hypothetical investor who missed just the best 5 days in the market since 1988 could have reduced their long-term gains by 37%.
