Safe havens are tempting in a geopolitical crisis, but fear is not an investment strategy
With much of the Middle East still upended by the war, the urge to pull back from the markets is understandable. But the evidence, both historical and behavioural, points to a different conclusion, says Liz Ann Sonders
As geopolitical tensions continue to dominate headlines and market volatility once again tests investor resolve, the temptation to act – to sell, to reallocate, to find some semblance of safety, can feel overwhelming. This is a natural response, rooted in both human nature and the instinctual need to “do something” when faced with uncertainty. Yet time and again, history has proven that fear is not, and never has been, an effective strategy for navigating the markets. In fact, it is often the costliest mistake an investor can make.
At this particular moment, with much of the Middle East still upended by the war, we are faced with ever growing uncertainty or even the lack of credible directional clarity, as it most often is with most crises. In such an environment, the urge to pull back from the markets is understandable. But the evidence, both historical and behavioural, points to a different conclusion. It is not timing the market that builds wealth, but time in the market. The discipline to stay invested through periods of volatility has consistently separated successful long-term investors from those who let emotion dictate their financial decisions.
The impulse to sell during periods of uncertainty is as old as investing itself. It is rooted in the human brain’s evolutionary wiring. When faced with a threat, whether it’s the rustle of a predator in the bushes or the sight of a portfolio in decline, our fight-or-flight response kicks in. This instinct, while critical for survival in prehistoric times, works against us in the modern world of investing. As Daniel Kahneman and Amos Tversky famously explained in their ‘Prospect Theory’, losses feel significantly more painful than equivalent gains feel pleasurable. This loss aversion leads investors to overreact to short-term declines, often exiting the market at precisely the wrong time.
Markets are not as fragile as they appear
But markets are not driven solely by fear, and they are not as fragile as they may appear in moments of crisis. History, in fact, offers a sobering reminder that markets have weathered far worse than the current geopolitical turmoil. During the Great Depression, for example, the Dow Jones Industrial Average fell nearly 90 per cent between 1929 and 1932 – marking the most severe bear market in US history. It took decades for the market to recover fully, but recover it did, rewarding those who stayed the course with significant long-term gains.
Similarly, the dot-com bubble of the early 2000s saw the NASDAQ plunge nearly 77 per cent from its peak. While the pain of the crash was severe, those who maintained their positions eventually reaped the benefits of a technology-driven resurgence. The global financial crisis of 2008 serves yet another example. At the nadir of the crisis, the S&P 500 had lost over 50 per cent of its value. Yet from that low in March 2009, the index roared back, delivering over 330 per cent in returns during the subsequent decade, marking the longest bull market in history.
Even in the face of the COVID-19 pandemic, one of the most rapid and severe market crashes in recent living memory, staying invested proved to be the right decision. The S&P 500 plummeted by nearly 34 per cent in a matter of weeks but recovered all its losses within five months – the fastest rebound on record. Each of these crises, while unique in its catalysts and consequences, underscores a consistent truth: markets are remarkably resilient.
That said, it’s worth keeping perspective on what these episodes do – and don’t – tell us. Markets can recover at very different speeds, and the path is rarely smooth, with plenty of sharp rallies and setbacks along the way. Put simply, past performance is no guarantee of future results. The more reliable lesson is not that outcomes are guaranteed, but that decisions grounded in a long-term plan and an appropriate level of risk tend to travel better through uncertainty than decisions made in the heat of the moment.
Time in the market, not timing the market, is the enduring truth that every long-term investor must embrace
To navigate these periods of uncertainty, investors would do well to adopt a more philosophical approach. The ancient Stoics, for example, advocated focusing on what we can control – our actions and choices, while accepting what lies beyond our influence. For investors, this means maintaining a disciplined approach to asset allocation, resisting the urge to react to short-term volatility, and staying focused on long-term goals.
Selling off during moments of crisis may provide short-term relief, but it often comes at the expense of long-term returns. Patience, perspective, and discipline are not just virtues; they are essential tools for navigating the ups and downs of investing.
As we face the current uncertainty, it is worth reflecting on the lessons of history and the principles of behavioural science. Markets, like human nature, are resilient. Those who have the courage to stay invested, even in the face of fear, are often the ones who emerge strongest on the other side.
Time in the market, not timing the market, is the enduring truth that every long-term investor must embrace.
Liz Ann Sonders is managing director, chief investment strategist at Charles Schwab