Geopolitical sell-offs are typically short-lived...

A new dimension of risk has entered the financial markets with heightened geopolitical tensions and the unfolding situation in Ukraine.

Many investors are understandably asking whether a link exists between current events and financial markets’ performance. They worry that geopolitical developments may be significant drivers of asset returns.

However, when we examine previous geopolitical events from the past 60 years, we find that while equity markets may react negatively to the initial news, geopolitical sell-offs are typically short-lived and returns over the following 12-month period are largely in line with long-term average returns.

Vanguard analysis evaluated the market reaction to 22 geopolitical events, shown in the chart below.

On average, U.S. stocks had a 5% total return in the six months following an event and a 9% total return in the 12 months after an event.

As always, Vanguard believes investors should focus on the things they can control despite all the market noise, such as having clear, appropriate investment goals; developing a suitable asset allocation using broadly diversified funds; minimizing investment costs; and maintaining perspective and long-term discipline.

Vanguard Australia