What if I told you that factory production levels in China directly affect your ability to save for retirement? What if I told you that the outcome of elections in Spain and Italy made it tougher for you to afford a home in Texas? How about a tweet wiping out a chunk of your 401k in a single day of trading?
While it might seem far-fetched, all of the above scenarios are absolutely real. If you aren’t paying attention to geopolitics these days, you are shooting yourself in the foot when it comes to having a financial edge.
Geopolitics has always been a fascinating subject to me. I studied it both at home and abroad. Learning at Northeastern and the University of Sydney was invaluable in shaping my long-term, global interest in finance and economics. Multiple viewpoints on the same subject is the best medicine for anyone eager to learn.
It’s All Connected
Today, I want to cover how geopolitical events can influence your personal financial situation. We will also cover a few tools that exist out there today which help you track geopolitical risk as it relates to your investment portfolio. Finally, we will wrap up with some suggestions on “hedging” against geopolitical risk.
Geopolitics at Work – An Example
Going back to my earlier point, we must understand how interconnected our global financial system truly is! I’ll bet most of you reading this aren’t aware that the government of Spain kicked it’s Prime Minister out of office on June 1st of this year. Around the same time, Italy also saw a major shakeup in their government.
Hardly a topic of interest in the United States when we’ve got the NBA and NHL playoffs in full swing, right? Why would Italian and Spanish politics ever matter to you or me?
That particular week of geopolitics sent shockwaves through the global markets. Several of those waves had a direct effect on ordinary citizens of the US like myself. The Dow Jones dropped 450 points as fear spread all over the global financial system over the week. The “Eurozone” raising a red flag puts us all on high alert across the pond, and investors got skittish about the outcome. My 401k took a big hit that week. Anybody with a portfolio exposed to equities, whether US or international, had a painful few days.
All this because of a political power struggle thousands of miles away from us. Peeling back the layers of a geopolitical event and studying its impact on the homefront yields some interesting results.
How to Track Geopolitical Risk?
We covered BlackRock Financial in a previous post. BlackRock runs the iShares family of index funds and ETF’s. While I’ve always liked those funds, BlackRock also puts out a ton of valuable market research for free to the public. The information is out there to anyone who seeks it. The BGRI Dashboard is one of their coolest productions yet.
BGRI stands for BlackRock Geopolitical Risk Indicator. The BGRI uses specialized research and market tracking to list out the “Top 10” geopolitical risks to the world economy. You can even drill down item by item for a more granular look (for those who love reading about risk).
Historically, the world has seen major events like the Arab Spring skyrocket the BGRI index. The US-based housing market crisis of 2007-08 also sent the global economy into a frenzy.
The BGRI is a great tool for keeping tabs on whats happening in the world at a high level. From up there, it’s easier to see how global events can have an impact on your personal portfolio. BGRI lists out risk-sensitive assets, specific to each of the Top 10. This helps you to not only realize where the dangers are, but invest/avoid accordingly.
This is just one of many web-based tools available for tracking geopolitics!
How To Hedge Your Portfolio From Geopolitics
In addition to basics like not putting your money into one stock or one particular fund, there are ways to hedge geopolitical risk and market volatility. The impact of heightened global tension is a more sensitive equity market.
Chinese tariffs and the White House’s day-to-day actions towards Beijing cause big rises and steep drops. Luckily, we have an equity asset designed to track market volatility! The VIX index rises as markets become more uncertain and volatile, and often sees a jump when global tensions rise. For our more savvy investment minds out there, check out what Bill Ackman had to say about the VIX and geopolitical risk last fall.
In addition to certain volatility indexes like the VIX, precious metals are an option. In particular, gold really shines when geopolitical risk picks up (sorry for the terrible pun). For example – between 2007-2010, the economy was largely in shambles from the housing crisis. Over that same time period that saw the Dow Jones get decimated, the price of gold actually went up. Price per ounce of gold went from about $625 to $1200, at the same time many peoples 401k’s were getting crushed.
Think Globally, Save Personally
It’s tough to follow geopolitics on a day-to-day basis without getting overwhelmed by the good, bad, and crazy out there. Much like social media, too much can result in a negative effect. Nonetheless, keeping tabs at the global level will help you make smarter moves with your money. At the end of the day, that’s all we’re after!
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Joe Savoia
Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.