I never thought that I’d be commenting on the potential financial impacts of President Trump and Kim Jong-un’s sabre rattling.
But, here we are.
Fiery statements from North Korea and heated responses from the US are nothing new. Surprisingly, North Korean missiles flying over Japan aren’t new either. Take a look this from the The Guardian on September 1, 1998.
Regardless, North Korea’s latest missile “test” strained an already precarious situation. Disliking any additional uncertainty, US and international markets opened lower on the morning of Tuesday, August 29th following the missile test. Interestingly, most of these markets largely recovered by the end of their respective trading days.
Since I’m not an international relations expert or a military strategist, I’m not going to forecast the outcome of these US / North Korean exchanges.
Relying on experts in those fields, it seems as though avoiding an armed conflict is certainly possible, and actually somewhat likely, if President Trump and Kim Jong-un can prevent escalating the situation and avoid misinterpreting the other’s incendiary rhetoric. Easier said than done.
What does this have to do with your investments? What do you do or not do, when missiles, talk of military action, and media hype, dominate the news cycle?
First, we need to touch on how to think about this situation.
Circumstances like these often promote possibilistic thinking, which attempts to cover every conceivable outcome. What happens if North Korea attacks Japan, Guam, or Hawaii? What happens if missiles hit California? What happens if nothing occurs? This list is endless and not overly helpful. It’s essentially “what if…” thinking. You can do this with any topic, not matter how serious or trivial.
Thinking this way paralyzes rational decision making and provokes anxiety. So, we’re not going to do it.
We’re going to apply probabilistic thinking, which focuses on what’s likely to happen. Given what’s likely to occur, we can define our next steps.
For North Korea, I think we have three main scenarios. Depending on what you think will occur, you can choose your next actions accordingly.
- Scenario 1: President Trump and Kim Jong-un continue exchanging verbal barbs, but deft diplomacy deescalates the situation.
- Probability: highest (I hope)
Investment actions: None – assuming nothing has changed with your personal situation, your investment strategy doesn’t need to shift. Investors often make errors adjusting their portfolios in response to irrelevant external factors.
- Probability: highest (I hope)
- Scenario 2: North Korea fires missiles into a US possession/territory or state, Japan, and/or South Korea, sparking an armed conflict.
- Probability: lower (I hope zero.) This would be a horrible situation with innumerable casualties.
- Investment actions: Unless you believe that this conflict would ultimately destroy western civilization (see Scenario 3), eventually markets and capitalist economies would get back on track. Would there be disruptions and setbacks, certainly. However, during a war, products and services are still very much needed at home and abroad. Companies wouldn’t cease to generate revenue. Corporate management teams would have to adapt to a changing landscape, but that is precisely one of their functions.
You might be thinking, “I agree with this, so I’ll sell now and buy back in once everything is getting better.” If you can time the markets twice, yes twice, then go ahead and do it.
Figuring out when to sell is difficult enough. When will the conflict start? Tomorrow? In a month? In 6 months? You need to time the sale pretty well.
Let’s say you’re able to do it. Now comes the trickier part...when to get back in. “When I can see light at the end of the tunnel, then I’ll buy back in,” you say. Good luck with that.
In recent memory, perhaps the best comparison we have is the financial crisis. Almost no one timed the exit and reentry points to the market correctly. Many claimed to have done so, but upon closer examination you’ll find countless items debasing or at least minimizing their claims. (Remember: if someone can time the markets reliably, she/he would be doing it and after long enough, you’d hear about it.)
Bottom line, you’re not going to be the person who times the entry and exit points even remotely well. Here’s what usually and unfortunately happens:
- Crisis occurs
- Investor panics and sells out after sustaining a 25% to 35%+ loss
- Investor sits on the sidelines for months or years, waiting for a “perfect” time to buy back in (HINT: there is not perfect time)
- Investor misses an eventual market recovery and the growth in her/his investments is permanently stunted (she/he also misses receiving dividends and interest)
Don’t do this. Stay invested.
- Scenario 3: A conflict beings on or near the Korean Peninsula, spreads throughout the globe, destroys much of the modern world, and reverses countless years of modern advancements.
- Probability: I really hope zero.
- Investment actions: Irrelevant - there’s no way to position your 401(k) for this.
If you fully believe this scenario will occur, you need to start doomsday prepping and I’m certainly not qualified to advise on that.
From the scenarios above, unless you believe that modern society is about to disintegrate, I would not change your portfolio. If you’re still really concerned and have to do something, consider decreasing your exposure to publicly-traded South Korean companies.
Of course, this assumes that your investments are already correctly positioned for your objectives, time horizon, and risk tolerance/preferences. If not, changes are definitely in order.