Will war between the US and North Korea affect your savings?
War between North Korea and America could be likely, but does that mean you should be running for cover and protecting your money? Angelique Ruzicka investigates.
If you’ve been watching the news (particularly channels like CNN) you’d be forgiven for thinking that America will imminently declare war on North Korea. Kim Jong Un’s persistence with testing nuclear missiles – in the six years he’s been in power he’s reportedly tested eighty four missiles – has egged on America’s presidents on several occasions.
The New Yorker reports that Trump has conveyed that in a meeting with him and Barack Obama, ‘Obama predicted that North Korea, more than any other foreign policy challenge, would test Trump’. As if to irritate the Americans even further North Korea launched its first intercontinental ballistic missile, powerful enough to reach the US. It’s was provocative and has made many nervous.
Whether this will result in a full blown war is anybody’s guess. But what, if anything should you as a South African investor do about it? While the situation may seem dire and Apocalyptic in nature, one finance expert cautions against doing anything drastic.
“Investors who get ‘spooked’ by the possibility of a looming war between North Korea and the United States of America should not be tempted to make rash portfolio changes due to this news. It is likely to do more harm to their long-term performance than if investors opt to ride out the pending storm,” says Clive Eggers, head: investment analytics at leading wealth and financial advisory firm GTC.
Instead, Eggers recommends spending time and attention on portfolio construction to ensure it can withstand known and unknown shocks. “It is understandable that investors become concerned when they see news suggesting the world may be facing another war, but a panic reaction can be extremely detrimental to long-term savings.”
He adds: “This is certainly a significant tail risk – that is, a risk with potentially large consequences but with a low probability of occurring – but we caution against overreaction to such probabilities.
He warned against reacting to every threat of war. “We believe it is preferable to err on the side of caution and prudence, while holding a strategically diversified portfolio with buffers against the market’s unknowns. With a good long-term strategy, it is not necessary to react to every threat presented by the market, as these often appear much larger in the moment than in reality.”
Thanks to American and North Korean tensions, there has been an increase in demand for so-called safe-haven assets such as gold and cash offering protection and value, but Eggers points out that these assets may not be in line with your objectives.
He warns that reacting to short-term changes and tensions will not help to achieve long term investment objectives. “We have already seen a pull-back in these ‘safe-haven’ assets’ prices. In addition to maintaining a diversified portfolio, we also aim to include strategies that are focused on preserving capital and minimising losses when markets experience downturns.”
Eggers adds that today’s interconnected world and the growing number of global companies on the local stock exchange have significantly increased tail risks – alongside opportunities, over the past decade.
“This has meant that investors need to exercise discretion when making subtle adjustments to portfolio construction as and when fundamental changes occur. At GTC we have also engaged in considerably more scenario testing so that we may better see the effects of various events on our portfolios.”
Eggers concludes: “The most important thing is to trust in the investment planning process put in place with your financial advisor or asset consultant, and not be tempted into reacting to volatile short-term movements. Investors who stay focused on their long-term goals generally ride out these short-term storms in difficult times with less damage to their wealth than those who attempt to be their own portfolio manager.”