How Terrorists Impact Your Investments

 The horrific November 13 Paris attacks reminded us of that evil still inhabits the world. But it’s foolish to believe that twisted people like those who perpetrated these acts permeate society.  They are but a tiny fraction of all mankind. Nonetheless, it shakes the soul to witness yet another example of the world’s long, unfortunate, and unacceptable history of man’s inhumanity to fellow man.

With these events two weeks behind us, we feel it is timely to discuss the impact unexpected global events have on your investments. Of course, one of the goals of terrorism is to wreak havoc on financial markets and the economy.  Some have made the case that 9/11 accelerated the negative economic cycle that climaxed with the sub-prime mortgage crisis.  In fact, in the 12 months following the attacks of 9/11, US GDP was only 0.3% lower than that of the previous year (source: IMF/OECD).

One’s imagination could run wild with the “what-ifs,” yet over the long run, wars, terrorism, natural disasters, and other unforeseen global externalities have proven to have little long-term impact on the financial markets, the economy, and consequently, investors’ portfolios. 

Alberto Abadie of Harvard’s Kennedy School of Government published a paper in 2007 that sought to better understand and quantify this phenomenon.  His conclusion was that these events tend to have a greater impact on smaller countries and those who have experienced sustained periods of terrorism like Columbia, Ireland, and the Basque region of Spain. 

Larger countries may see a reallocation of foreign net investment, but since the US is not really dependent on foreign capital, the impact on our $17 trillion economy is quite small.  In addition, he notes that while in the short run, consumer and corporate spending may stop temporarily, those expenditures tend to get deferred into future periods.

The chart below from Dimensional Fund Advisors shows the growth of $1 if invested in the S+P 500 over the past 45 years. It highlights major global events along the way.  The resiliency of our diversified economy and of our system of government is unmatched in the world.   

As investors, we can’t ignore any events, large or small, and the potential risks they pose to our portfolios’ long-term growth.  That said, despite a history (and probably a future) of intermittent global shocks, we are confident that maintaining a disciplined and broadly diversified portfolio the wisest approach to investment success.

source: Dimensional Fund Advisors