You will be able to judge whether a geopolitical event is likely to change long-term earnings or only short-term prices.
Every geopolitical shock arrives with the same feeling: this time is different, this one changes everything. Sometimes it does. Much more often, markets fall hard, then recover within months once the range of outcomes narrows. The skill this reading builds is telling the two apart, or at least asking the questions that separate them, before you decide whether to do anything.
Uncertainty itself pushes prices down. When nobody knows how bad an event will get, investors demand a bigger discount to hold risky assets, and prices fall to make room for the worst case. As the picture clears, even if the news is bad, the worst case usually drops off the table and some of that discount disappears.
The history is consistent. After the attacks of 11 September 2001, US stock markets closed for several trading days and fell sharply when they reopened, yet the main indexes were back above their pre-attack levels within a few months. After Iraq invaded Kuwait in August 1990, shares fell for months, then rallied strongly once the US-led air campaign began in January 1991, as lesson 4.1, How geopolitical shocks reach prices, described. Many smaller scares, from missile tests to border clashes, barely register a year later.
Here is the pattern with made-up figures. An index falls 12% in the month after a shock, then rises 15% over the following eleven months. A year on, it stands about 1% above where it started: 0.88 times 1.15 is 1.012. An investor who sold at the bottom of that first month and waited for things to "settle" would have needed to buy back at higher prices to end up where they began.
The shocks that stay in prices are the ones that change what businesses earn. Three kinds stand out.
Changes in energy supply are the first. The 1973 oil embargo, covered in lesson 4.2, Energy markets and OPEC+ decisions as a market input, raised energy costs for years and changed which industries and countries prospered. Europe's loss of cheap Russian gas after 2022 permanently raised costs for some energy-intensive manufacturers.
Changes in trade routes and rules are the second. When tariffs or export controls stay in place, supply chains are rebuilt around them and the winners and losers from lessons 4.3 and 4.4 keep winning and losing.
Changes in capital access are the third, and the harshest. In March 2022, as sanctions and capital controls made Russian shares impossible for foreign investors to trade, the index provider MSCI removed Russia from its emerging markets indexes at a price of effectively zero. Foreign holders of Russian shares through index funds lost that part of their holdings outright. No recovery followed for them, because they could no longer own the assets.
Currency is a quieter version. After the UK's Brexit vote in June 2016, the FTSE 100 index fell, then recovered within days in pounds, helped by the many multinationals in it that earn abroad. But the pound itself fell to its lowest level against the US dollar in more than three decades and stayed low for years. An investor measuring in Singapore dollars saw a loss that stuck, and the local index never showed it.
Selling after a shock feels like taking control. In practice it commits you to two decisions instead of one: when to sell, and when to buy back. The first is made at the moment of greatest fear, usually after much of the fall has happened. The second has no natural trigger at all. The news rarely announces that it's safe to come back, and prices often recover before the headlines improve.
Behavioural Finance: why you make the money mistakes you make covers why this feels so compelling, in lesson 6.3, Recent returns, hot tips and the crowd. For this course, the practical point is that a sale made on a headline needs a reason that would still hold a year later.
So what should you do when a shock hits? Use the questions from this module to sort it. Which channels does it travel through? Does it change energy supply, trade routes or capital access for the companies you own, or is it mostly uncertainty? Has anything happened to your own needs for cash?
If the answer is mostly uncertainty, your written rules decide what you do. Your investment policy statement from Build and run an ETF portfolio, lesson 8.2, Rules for when markets fall and when they boom, already says how you rebalance and when. A shock that pushes your allocation outside its bands is a reason to rebalance under those rules, which you wrote on a calm day for exactly this moment.
If the answer is that the earnings of something you own have changed for years, that's a reason to review the holding properly, through the thesis review in lesson 11.4, Thesis review instead of price stops, rather than to sell in a panic on the day.
For the activity, pick one past shock, find where a major index stood just before it, a month after it and a year after it, and compare the first-month fall with the position a year later.
Review one past shock and compare the market's fall in the first month with where it stood a year later.
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