What the Iran conflict really means for your portfolio... and what to do now

Speaker Key:

GS              Gregory Sweet

WB             Wesley Blight

VO              Voiceover

00:00:00

GS              Welcome back to Let's Talk Investing. I'm your host, Greg Sweet. And today I'm joined by Wes Blight, Portfolio Manager from our Multi-Asset Management team, to discuss the recent escalation in conflict in the Middle East and what it means for markets and for long-term investors. It's one of those moments where the news cycle is moving faster than most people can process. So hoping you can help us slow things down and add some perspective. Wes, thanks for joining me.

00:00:26

WB              Happy to be here, even if the topic is a difficult one.

00:00:29

GS              Sure is. Let's start at a high level. What's actually happening so far in the conflict involving Iran? Investors are seeing the headlines, but are not always getting a clear picture, a structured picture. They're seeing images on TV, they're getting notifications on their phone, and it can be hard to connect the noise to what this actually means for their portfolio.

00:00:51

WB             You're right, and the headlines can be overwhelming. At a high level, tensions in the Middle East escalated sharply in late February and early March, with direct military actions involving the U.S., Israel, and Iran. We've already seen airstrikes, temporary shutdowns of key energy facilities, and disruptions to shipping routes in the region. What makes this different is that we've moved beyond proxy activity to a more direct confrontation, and naturally that raises the stakes.

00:01:19

GS              So what does all this really mean for markets and for investors? How should we be thinking about this from an investment lens?

00:01:26

WB             At the center of this, of course, are real human costs, loss of life, families displaced, and communities living with uncertainty. It's important to acknowledge that before we talk about markets. And when we talk about risk in an investment context, we don't want to lose sight of the fact that for people on the ground, this isn't abstract. This is their daily reality. And so hopefully there is a resolution soon. From a market perspective, concerns have quickly shifted to energy and oil prices, particularly because of the strait of Homuz. That's a critical choke point between Oman and Iran, and it carries roughly 20% of the world's seaborne oil. In volume terms, that's around 20 million barrels of oil a day. Again, it's roughly one-fifth of the global petroleum. It's one of the busiest and most strategically important shipping routes in the world. There's also additional uncertainty around Iran's political leadership and next steps, which adds to concerns about further escalation. And so geopolitical risk has reemerged as a clear driver for markets and it's showing up mostly direct. And so geopolitical risk has reemerged as a clear driver for markets and it's showing up most directly in energy and in inflation expectations. And again, as I just said, we're already seeing that feed into crude prices, and that can impact prices at the pump, transportation costs, and supply chains more broadly. All of that matters for inflation. High energy costs tend to push inflation higher at the margin because if elevated oil prices persist, it could slow the pace of interest rate cuts because central banks have to weigh the inflationary impact coming from energy. Now, beyond just energy, equity and bond markets broadly have seen heightened volatility. increased uncertainty tends to trigger a risk-off sentiment. Some investors pull back from risk assets, move towards those traditional safe haven areas. So we've seen flows going into gold, some strength in the US dollar already. And all of that is very consistent with that classic geopolitical risk episode. So far, the market reaction has been fairly textbook. You can see investors buy and sell the news with limited clarity in the early stages. It's really a knee jerk response to the heightened uncertainty that we're having.

00:03:31

GS              I totally agree.

00:03:33

WB             The key point from an investor perspective is that near-term market moves are largely about reacting to uncertainty and noise, not about a complete rewrite of those long-term fundamentals. History tells us that the average drawdown around major geopolitical shocks is about 5%. And markets typically recover from that decline in roughly a month and a half. Once more information ultimately becomes available and gets digested by the market.

00:04:00

GS              That leads naturally to the next question. What is your team doing in response? Are they making any major changes? Sitting tight? How should our investors think about what's happening behind the scenes?

00:04:10

WB             The first thing to say is that events like this are not unexpected or unfamiliar to us. This isn't the first time we've seen geopolitical shock, and unfortunately, it won't be the last. If you look back over the last several decades, from the Gulf War to the Iraq invasion to various regional conflicts, markets have navigated through many episodes just like this. And we've weathered similar situations many times before. So there's a well-established playbook in terms of how we monitor and respond. Right now, our portfolio teams are actively monitoring developments, both our multi-asset management team at the portfolio level and the underlying fund managers that we invest with. We are watching the conflict itself, policy responses, energy markets, and how companies themselves are reacting. For our portfolio solutions, the strategic asset allocation remains unchanged. That's intentional. These portfolios are built around long-term goals, long-term time horizons, and those have not changed. One event, even a serious one, doesn't change that. Where we may adjust over time is in our tactical positioning, which focuses on the next 12 to 18 months as those risks and opportunities become clearer. If anything, events like this really just reinforce the value of diversification across asset classes, regions, styles, sectors. And as always, having a diversified, professionally managed portfolio means you're not betting on one outcome of any one region at exactly the wrong time.

00:05:44

GS              Well, if you’re talking about sustaining income, there are a whole bunch of different You know, your team is truly trained for this. It's a lot like pilots training for turbulence. Most flights are smooth. But you still want someone in the cockpit who's rehearsed what to do when the seatbelt sign comes on. You don't want them panicking or improvising. You want to follow that same checklist they've been running through dozens and dozens of times before. That's essentially what your team is doing. Staying calm, following process, and keeping clients' portfolios on course even when the ride gets a bit bumpy. Having said that, investors are still going to think, should I get out? Should I move to cash? Is this the start of something bigger? What should investors actually do in this kind of environment?

00:06:28

WB             The first step is recognize the initial shock response. It's completely normal for volatility to trigger emotions like anxiety, fear, and the urge to act. In fact, staying invested is often the hardest but most important decision in periods like this. The temptation is to react to headlines, social media, or even what friends and family are doing. But those are usually not good sources of long-term investment discipline. Instead, we'd encourage investors to focus on their long-term plan, not on short-term market moves. For most investors, their time horizon is measured in years or decades, not days or weeks. During volatile periods, many investors understandably feel the urge to do something, just to regain a sense of control. But very often, the best decision is to not act impulsively. Amid momentary uncertainty, long-term investors are tested by short-term thinking. Cash and other so-called safe haven options can feel like a bomb for the sting of volatility, but that relief is usually just temporary. The bigger risk is missing the initial stages of a recovery. Markets often rebound before the news flow improves, and missing those early gains can leave lasting damage to long-term returns.

00:07:47

GS              Couldn't agree with you more here. And this is where advisors play a critical role. It can be incredibly helpful to speak with your advisor, to review your goals, revisit your plan, and talk through concerns calmly and rationally. So Wes, thanks for the level-headed and very informative perspective here. As we wrap up, can you put this into a broader historical context? We've been through difficult headlines before. What does history tell us?

00:08:15

WB             History tells us a fairly consistent story. From past wars to regional crises and geopolitical shocks, markets often first decline initially as the news breaks, then stabilize as investors gain more clarity, and then they eventually recover. And often that recovery is well before the conflict itself is fully resolved. If you look at over 20 of some of the most major geopolitical events going as far back as the early 1940s, the median one-year return after the event is still positive. Now, that's around the mid-single to high-single digits. Markets have weathered wars and conflicts before. While volatility often follows these events, it rarely alters the long-term trajectory of markets. The path can be bumpy, but direction over decades is driven by innovation, productivity, and earnings growth, not by any single event. Just think about episodes like the Cuban Missile Crisis, the Six-Day War, or Iraq's invasion of Kuwait. All felt existential at the time, and yet one year later, markets were meaningfully higher in each of those cases.

00:09:23

GS              So I guess for investors, the core advice is actually quite simple. Remain calm. It's easy to let emotions take over during stressful periods. Sitting on the sidelines or selling for the temporary relief of cash might cost more in the long run. Stay diversified. Diversification is essential during market stress. A professionally managed portfolio solution is designed to hold up better than a narrow, concentrated exposure. Be patient. Market downturns and spikes in volatility don't last forever. While it can take time, markets have historically recovered and rewarded the patient investor. Stick to the plan. Downturns come and go. A sound financial plan provides the discipline to ride out the short-term uncertainty. Focus on what you can control, maintain a long-term view, stay diversified, and let experienced portfolio managers guide your investments through the difficult periods. So again, to summarize for investors, yes, this is unfortunate and uncomfortable. Yes, markets are reacting. But no, this doesn't mean the long-term case for investments is broken. Focus on what you can control, maintain a long-term view, stay diversified, and let experienced portfolio managers guide your investments through the difficult periods. So again, to summarize for investors, yes, this is unfortunate and uncomfortable If you'd like more perspective on how markets have historically behaved after geopolitical shocks, talk to your advisor. We have charts and data we can walk you through together to put today's concepts into much longer and far more reassuring context. Wes, thanks for walking us through this.

00:11:00

WB              Thanks again for having me. 

00:11:01

GS               And to our clients, thanks for listening. 

00:11:03

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