We live in scary times – some would say the most frightening since the missile crisis of 1962, when the world was brought to the brink of nuclear war over the Soviet Union’s decision to deploy weapons of mass destruction in Cuba. Thankfully, catastrophe was averted.
This time around, it is the embattled country of Ukraine that is the focus of the world’s attention. President Putin’s implied threat of a nuclear response to the West’s decision allowing its weapons to be used by Ukraine in attacks on Russia has got some military experts whispering three words none of us thought we would ever hear in our lifetimes: World War III.
Of course, it is only a whisper – and as Matthew Savill, a director of military sciences at the Royal United Services Institute told The Times: ‘We should never be blasé about the nuclear risk, but that seems incredibly extreme.’
Maybe, as one observer told me on Wednesday, what we are witnessing is the ‘final round of sabre rattling’ between the outgoing US President Joe Biden and the brinkmanship of President Putin before Donald Trump is inaugurated as Biden’s successor in late January.
Once Trump is in the White House, this person says, he will broker a deal that will bring an end to the war in Ukraine.
He could be right (let’s hope so), he could be wrong. But we all need to wake up to the fact that we are now living in a world where geopolitical risks will remain sky-high for the foreseeable future.
Russia will continue to undermine the West with its mix of cyber and infrastructure attacks – supported by renegade states such as North Korea and Iran.
And of course, tensions in the Middle East will remain high, while waiting on the horizon is the issue of Taiwan: what would be the West’s response were China to invade the island?
Putin’s implied threat of a nuclear response to the West allowing its weapons to be used by Ukraine in attacks on Russia has led some experts to suggest World War III may be on the cards
Talking about the impact of such risks on our investments may seem obtuse (apologies to anyone who feels offended). After all, as Robert Minter, director of ETF (exchange traded fund) strategy at asset manager Abrdn, told me: ‘If World War III is coming, our focus should be on ticking off our bucket lists as soon as possible.’
Let’s not go down that route, but instead think about the measures we can take to ensure that our Isas, pensions and investment portfolios are best prepared – and positioned – to withstand any sharp stock market corrections triggered by an escalation of the war in Ukraine.
As Jasmine Yeo, a fund manager at investment house Ruffer, told me: ‘We are now living in a multi-polar world defined by greater volatility and inflation risk. Investors will require a wide-ranging and flexible tool kit to protect and grow their portfolios.’
It’s a view shared by many investment managers, multi-asset experts and financial planners. Here are their best ideas to protect your money from Putinisation and escalating geopolitical risks.
Diversification is the key: mix up your assets
One of the key building blocks to successful investing is diversification. This means a portfolio comprising exposure to a mix of assets – equities, commodities and bonds – and individual holdings (investment trusts and cost-effective exchange traded funds which track specific indices).
Alongside this should be a pool of cash (in the bank or an Isa) – primarily to meet financial emergencies, but a slice of it to buy investments if markets correct sharply (it’s what fund managers often do).
Today’s troubling geopolitical backdrop makes diversification more critical than ever. It’s a view that Ben Kumar, head of equity strategy at investment manager 7IM is keen to stress. ‘Diversified investing always makes sense, but more so in the face of global conflicts,’ he says.
‘What you need to do as an investor is reduce your ignorance tax – that is, things happening that you don’t understand and hadn’t predicted, which then hurt your investment returns.’
Donald Trump has promised to broker a deal when he enters the White House to bring an end to the war in Ukraine
He adds: ‘This means some money in equities, spread around the world, and some in bonds. The more finely you spread your assets, the less likely one stray missile or a ratcheting-up of global conflict will wipe out all of them.’
Corinne Lord, senior investment specialist at financial planner St James’s Place, echoes Kumar’s words. She says: ‘When constructing portfolios, investors should focus on diversification and risk management, recognising that volatility and stock market drawdowns are inherent in investing.’
How you divide your portfolio into the different asset silos depends upon your goals, age, and attitude to risk.
A financial adviser can assist, while some companies such as BlackRock and Vanguard offer one-stop portfolios (respectively Map and LifeStrategy) that match your attitude to investment risk. These are great for starter investors, but not necessarily so for those with existing investments.
For investor diehards who prefer a do-it-yourself approach, it is more important than ever to embrace diversification while ensuring your equity holdings are fit for purpose.
It shouldn’t necessarily mean a complete overhaul of your investments. But as Jason Hollands of wealth manager Evelyn Partners says: ‘It is always better to have some element of “insurance” in your portfolio that will act as ballast in times of crisis.’
In uncertain times, it’s shrewd to go for gold
Gold is the classic ‘safe haven’ asset that investors seek out in times of crisis. It thrives on uncertainty. In the past few days, the price has risen in the US to above $2,700 an ounce: in the UK, to a new high of just over £2,160. Both prices are up more than 30 per cent since the start of the year.
‘The mix of geopolitical tension and economic gloom is proving the perfect storm for gold – and it’s hard to see that changing,’ says Adrian Ash, head of research at BullionVault, a firm that enables people to buy and sell gold online.
The gold price is also being driven ever higher by other factors: most notably, strong buying from the world’s central banks (China, India and Russia leading the way). For example, in 2021, before the Ukraine war, central banks worldwide bought 400 tons of gold. This year they are on course to buy double that amount.
Earlier this month, investment bank Goldman Sachs said that the gold price could reach $3,000 by the end of next year, in part because of heightened geopolitical risks. That could turn out to be an underestimation if geopolitical tensions remain to the fore.
‘The appeal of gold bullion as a tangible and timeless asset is clearly growing for UK investors,’ says Ash. So far this month, BullionVault has had more new customers per day than at any time since May 2021. Although the company allows you to buy physical gold (stored in its vaults), investors can also get exposure to the metal through funds that track its price. These can be bought via investing platforms.
For example, Bestinvest, the trading platform of Evelyn, likes Invesco Physical Gold. Alex Watts, fund analyst at trading platform Interactive Investor says another sound option is iShares Physical Gold.
Alongside Ukraine and its president Volodymyr Zelensky, pictured, Russia will continue to undermine the West with its mix of cyber and infrastructure attacks, writes Jeff Prestridge
Experts are divided on the amount of gold exposure that investors should have. Bestinvest’s ‘ready-made’ portfolios – for those who don’t want to manage their own investments – hold between four and five per cent of assets in gold. BullionVault’s Ash says its UK clients typically have between 15 and 20 per cent of their investible wealth – outside of their home and pension – in physical bullion (most of it gold).
Interactive’s Watts says an alternative approach is to buy a fund that benefits not just from a rising gold price but from stronger prices for other commodities, such as precious metals, industrial metals, energy and food.
He adds: ‘As we saw in 2022, when Russia invaded Ukraine, commodity prices – for example energy and food – rose as disruption to supply chains materialised.’
He says WisdomTree Enhanced Commodity offers investors such diversified commodity exposure – it has around 18 per cent of its assets in gold.
Don’t panic: park cash in government bonds
Another safe haven in times of global crisis is government bonds. Says Hollands: ‘If war panic does grip the financial markets, I would expect fear-gripped investors to park money in UK gilts and US Treasury bonds. Yields on these are relatively attractive – with US Treasuries and UK gilts due to mature within ten years, yielding above four per cent. Funds to access such bonds include Vanguard US Government Bond Index and iShares Core UK Gilts.
David Coombs, head of multi-asset investments at Rathbone Asset Management, agrees. He says the uncertain geopolitical backdrop points investors in the direction of ‘quality’ – and that means sovereign bonds.
To give some perspective, the £3.2 billion Rathbone Strategic Growth Portfolio that Coombs runs has nearly 20 per cent of its assets in UK, US and Australian government bonds.
In war, the best form of defence is… defence
Financial experts passionately believe that investors should not jettison their shares and funds.
But they do urge some fine-tuning. For example, Coombs says defence firms are now obvious ‘cornerstone portfolio stocks’ – he holds shares in both US defence and aerospace manufacturer Lockheed Martin and French defence firm Thales across the Rathbone funds he manages.
Dan Coatsworth, investment analyst at investing platform AJ Bell, says fund HANetf Future of Defence is an easy way to get exposure to a diversified portfolio of defence stocks. He adds: ‘It has delivered a 60 per cent return since launching last summer.’
Coombs says other ‘sin’ stocks – oil and gas producers such as Chevron, Shell and Total – could benefit if oil prices rise. But the current price of Brent crude oil – $74 a barrel – is way below the peak of $124 in June 2022.
Investors should also look at capital preservation-based investment trusts whose mission is not to lose money – even when markets are falling. They include the likes of Capital Gearing, Personal Assets and Ruffer.
Of all the world’s stock markets, Coombs says the US gives him most comfort. ‘Now is the time to hold profitable, solid US stocks,’ he says – the likes of Alphabet, Amazon, and Microsoft. Blue-chip your investment portfolio.’
He adds: ‘At the other end of the investment risk spectrum, I would avoid small and mid-cap stocks in Europe – for obvious reasons.’
A simple way to get blue-chip exposure to the US market is through a fund that tracks the Standard & Poor’s 500, an index comprising the 500 largest listed firms in the country. Vanguard and iShares offer such companies.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.