War, Market Volatility, and Your Portfolio: Historical Perspective

If you're managing a substantial portfolio and following global events, you've probably wondered: how should the escalating geopolitical tensions around the world affect your investment strategy?

Whether it's the ongoing conflicts in Ukraine and the Middle East, rising U.S.-China tensions, or concerns about trade wars and cyber warfare, geopolitical risks have become fixtures of today's investment landscape. For high-earning professionals who understand portfolio fundamentals, the key question isn't whether these events will create volatility—they will—but how to position your wealth to weather these storms while avoiding costly emotional decisions.

Many traditional advisors will tell you to "stay the course" during volatile periods, but their AUM (assets under management)-based fee structure creates an inherent conflict: they benefit when your assets grow, regardless of whether that growth comes from smart strategy or simply market recovery. This misalignment can lead to generic advice that doesn't account for your specific situation or the sophisticated hedging strategies that might benefit your wealth level.

Here's what a century of market data tells us about war, geopolitical risk, and your portfolio.

The Surprising Reality: Markets Are More Resilient Than You Think

Let's start with what might be the most counterintuitive finding from historical analysis: geopolitical events usually have a smaller, shorter-lived impact on global markets than most investors expect.

Research analyzing major wars since 1990 shows that most conflicts had only a short-lived impact on equity markets, with the average duration of heightened volatility following wars lasting around 20 days. Even more striking, the U.S. stock market fell only about 3.5% the day after Pearl Harbor and about 3% after President Kennedy's assassination.

Consider these historical examples:

The pattern is clear: while war introduces volatility, markets often adapt and recover more quickly than anticipated, usually rebounding to pre-conflict levels within weeks to months.

Why Smart Money Doesn't Panic: The Defense Spending Effect

Here's something that might surprise you: U.S. stock volatility is actually 33% lower than usual during times of war and conflict.

Why? War causes defense spending to rise dramatically, making the future profitability of a wide swath of companies more predictable and less volatile. This isn't just about defense contractors—nearly all sectors show a decline in volatility when defense spending ramps up, including coal, steel, clothing, and textiles.

The mechanism is straightforward: increased government spending creates predictable revenue streams for numerous industries, reducing uncertainty about future earnings. Since at least the 1980s, Navy and Air Force spending has reduced stock volatility more than Army spending because these branches spend higher portions of their budgets on procurement, research and development, and testing.

Current Geopolitical Landscape: What's Different Now

Today's geopolitical environment presents some unique challenges compared to historical conflicts. The global BlackRock Geopolitical Risk Indicator shows uncertainty and volatility have become fixtures of the geopolitical landscape, with rapidly evolving U.S. policy, growing trade protectionism, increased government intervention in markets, and heightened global competition.

2025's Key Risk Factors:

Tariffs have been a dominant driver of financial volatility in 2025, with huge swings in bond and equity markets caused by ongoing policy uncertainty. Unlike traditional military conflicts, trade wars create sustained uncertainty about business costs and supply chains.

Stock prices tend to decline significantly during major geopolitical risk events, with the average monthly drop about 1 percentage point across countries, though it's much larger—2.5 percentage points—in emerging markets.

Energy security remains a top 2025 geopolitical risk, with Europe coping with huge challenges after losing access to cheap Russian gas, causing European gas prices to reach all-time highs.

The Numbers: How Much Should You Actually Worry?

Let's put this in perspective with real data:

What This Means for Your Portfolio:

The key insight: geopolitical risk events can spill over to other economies through trade and financial linkages, but the effect is at least twice as large for emerging market economies with high public debt, low international reserves, and weak institutions.

Sector-Specific Impacts: Where Volatility Concentrates

Not all sectors respond equally to geopolitical stress:

The Behavioral Finance Reality: Your Biggest Risk Isn't War

Here's what your financial advisor probably won't tell you: the biggest risk to your portfolio during geopolitical crises isn't the events themselves—it's your reaction to them.

Research drawing on a century of data shows that war discourse significantly predicts U.S. stock market volatility up to 12 months ahead, demonstrating that investor attention to war risks affects volatility predictability. In other words, how much investors worry about conflicts often matters more than the conflicts themselves.

Emotional responses to volatility become even more pronounced during global conflicts, when uncertainty is higher and market swings are sharper. The temptation to "do something" with your portfolio can be overwhelming when headlines are dominated by conflict and crisis.

The Cost of Panic: If you sold your $2 million portfolio during the 2022 market volatility when markets were down 20%, you would have locked in $400,000 in losses. Those who stayed invested recovered those losses and more.

This is where having an advisor with the right incentive structure becomes crucial. AUM-based advisors charging 1% annually would have lost $20,000 in fees from your panic sale—giving them a financial incentive to keep you invested, but not necessarily for the right reasons. A flat-fee advisor's compensation doesn't fluctuate with market timing decisions, allowing them to focus purely on what's best for your long-term wealth.

Portfolio Positioning: Practical Strategies for Uncertain Times

Given this historical context, here's your strategic framework:

Risk Management Hierarchy:

1. Essential: Global diversification - Core portfolio structure
2. Important: Quality fixed income - Government/high-grade corporate
3. Tactical: Hedge positions - 5-10% gold, commodities
4. Opportunistic: Sector tilts - Modest overweights to beneficiaries

When Professional Management Makes Sense

For high-income professionals managing complex financial situations, geopolitical risk management often requires more sophisticated strategies than basic asset allocation.

Advanced Risk Management: Professional advisors can implement hedging strategies using derivatives, currency hedging, and alternative investments that individual investors typically can't access efficiently. However, the advisor's fee structure matters enormously here—AUM-based advisors may be reluctant to recommend strategies that move assets to specialized platforms where they earn reduced fees.

Behavioral Coaching: Perhaps most importantly, having an objective advisor helps prevent the costly emotional decisions that destroy wealth during volatile periods. But this coaching is only truly objective when the advisor's compensation doesn't fluctuate based on your investment decisions. History suggests that the impact of international conflicts on markets is usually short-lived, and markets tend to recover within months following a crisis.

Tax-Efficient Rebalancing: Volatile periods create tax-loss harvesting opportunities and rebalancing needs that benefit from professional oversight. Flat-fee advisors can focus on tax optimization without worrying about how rebalancing decisions might impact their annual fees.

The Fee Structure Connection

Here's where this connects to our broader message about advisor selection: during periods of geopolitical stress, you want an advisor whose compensation aligns with your success, not their asset accumulation.

AUM-based advisors might discourage tactical hedges or alternative strategies that could reduce their fee base. They might also be reluctant to recommend strategies that require moving assets to different platforms or structures.

Flat-fee advisors have no such conflicts. They can focus purely on what's best for your portfolio during volatile periods, whether that means increasing cash positions, implementing hedging strategies, or moving assets to more appropriate vehicles.

The Bottom Line: Stay Rational, Stay Diversified

If history is any guide, it's not clear that geopolitical conflicts imply now is an especially good time to be buying risky assets, but they also don't typically justify major portfolio overhauls.

Your Action Plan:

1. Maintain perspective: Maintain a long-term focus despite short-term market volatility due to geopolitical events
2. Ensure diversification: Review your geographic and sector diversification
3. Consider tactical hedges: Small allocations to gold, commodities, or defensive sectors
4. Avoid timing the market: Timing the market during times of war is largely impossible
5. Focus on what you can control: Tax efficiency, costs, and behavioral discipline

The key insight for high earners: geopolitical risks are real and will continue creating market volatility. But history shows that well-diversified portfolios managed with discipline tend to recover from these shocks.

The biggest threats to your wealth aren't the headlines—they're the emotional reactions to those headlines and the conflicts of interest in traditional advisory relationships that might prevent you from getting optimal guidance during volatile periods.

As we've discussed throughout our series on comprehensive financial planning, your advisor's expertise should match your complexity, and their fee structure should align with your success during good times and bad.

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