A war breaks out halfway across the world. China’s red-hot economy slows to a crawl. The fallout from Brexit sends the pound’s value plummeting. Oil prices soar, then fall, then surge again. The news is always changing and always dramatic, but what does it all have to do with you and your portfolio?
Probably more than you realize. The fact is that no one, and no portfolio, can be isolated from the impact of world events. Your investments can and will be affected by global economic developments, but fortunately, there are some effective ways to protect yourself. Here are 10 ways headline events can shake up your investments along with some proven ways to reduce your portfolio exposure.
Recessions, inflation, and stock market crashes can have a direct impact on your investment and savings. Inflation can cut into your spending power and send the value of some assets, like bonds, lower. Recessions can shrink your portfolio’s value and may even put your own income and job security at risk.
Economic events affect assets in different ways, so you can prepare for economic upheaval by diversifying your portfolio. Spread your investments across various asset classes, such as stocks, bonds, real estate, and commodities, to reduce the impact of economic downturns on your portfolio.
You might first notice the effect of higher interest rates when your credit card bill goes up, or you start earning a little more in interest on your savings account, but rate changes can have broader effects. Central banks raise or lower interest rates in response to global economic conditions. Higher rates can slow down an economy growing too fast while lowering them can jumpstart faltering growth.
You can prepare for rate changes keeping a close eye on your loans and refinancing when lower rates become available. When rates rise, focus on paying down high-interest debts to minimize interest costs.
Global currency value changes constantly and can directly affect your portfolio. For instance, when you travel, you may notice things cost more or less than usual because of exchange rate changes. Some imported goods can become more expensive or cheaper when currencies fluctuate. These exchange rate alterations can also affect your returns on foreign investments, adding to returns when rates are favorable and detracting from them when times are tough.
You can reduce your portfolio’s exposure to currency risk by hedging. When you engage in international transactions, consider using mutual funds that invest in derivative contracts or currency options to protect against unfavorable exchange rate movements. You can also offset currency risk to some extent by investing a portion of your assets in mutual funds that invest in precious metals.
You can feel the impact of changes in oil prices every time you fill up at the pump, and fluctuations in agricultural commodity prices can show up in your grocery bill. Shifts in commodity prices also can affect your investments since some stocks benefit from price increases — think energy companies earning record profits when oil prices rise — and others are hurt by them.
You can insulate yourself from the impact of commodity prices by creating a flexible budget that can adapt to changing commodity prices. Consider bulk purchasing when prices are low and look for substitutes when prices are high.
Remember the toilet paper shortages of 2020 and how difficult buying a car was in 2021? In our interconnected global economy, events like trade wars or pandemics can disrupt supply chains, leading to shortages and price increases for certain goods. This can impact your cost of living and your ability to make purchases.
You can prepare by building an emergency stockpile of essential goods like canned goods, bottled water, batteries, and other items prone to shortages in advance so you always have the necessities on hand. It’s also a good idea to stock up for emergencies like power outages, hurricanes, and earthquakes.
Geopolitical events like wars or diplomatic tensions can have wide-ranging economic consequences. They can lead to uncertainty in financial markets, affecting your investments and retirement savings.
You can reduce your risk by diversifying your investments.1 Make sure to include assets typically less sensitive to geopolitical events such as dividend-paying stocks or government bonds.
Changes in tax laws and government regulations can affect investments in both negative and positive ways. For instance, a subsidy for energy-efficient appliances can save you money and motivate you to cut back on fuel use. A change in tax laws may make you want to put more, or less, in tax-advantaged investment vehicles.
You can stay ahead of the curve by keeping up with relevant tax and policy changes. Your financial professional may also be able to help you identify ways to adjust your portfolio as tax laws change to optimize your tax exposure.
Energy prices can be volatile, and they affect not just the cost of filling up your car but also heat and air conditioning, lighting, and the appliances that power nearly every phase of modern life. These costs are often driven by events far away, like war in the Middle East and conflict in Eastern Europe, and any rise in energy prices can have a profound effect on your budget.
Limit your exposure by increasing your household’s energy efficiency. Look for energy-efficient appliances, which can cut your usage significantly, and explore strategies to reduce your power bills. Include energy costs in your budget and think about investing in alternative energy sources like home solar where feasible.
If you have investments in global markets such as stocks or bonds, they can be directly affected by worldwide events. Market fluctuations can also influence your investment portfolio's performance.
Don’t let global events push you off course. Prepare by regularly reviewing your portfolio and making sure it continues to reflect your objectives, time horizon, and risk tolerance. A financial professional can help you periodically assess your investment strategy, rebalancing it to align with your financial goals. As with many types of risk, diversification can help. If you invest in a broad array of assets across global markets, you will be less vulnerable to events in any single market or asset class.
Your portfolio isn’t the only part of your financial picture that can be affected by global economic events. Your job may be impacted if markets and economies turn volatile. Losing a job or even simply having your hours or wages reduced can have a serious impact on your household finances.
You can protect against this risk by saving for emergencies during the good times. Most financial professionals recommend that you build up a rainy-day fund that can cover six to 12 months of temporary unemployment. You can also increase your value to employers by continuously updating your skills.
A variety of factors can affect your financial situation, some that are under your control and others that are not. You can’t eliminate risk from your portfolio, but by understanding what these risks are, you can begin to take steps to protect yourself. A financial professional can also help you identify factors that may pose a threat to your investments and suggest strategies for minimizing your exposure. In a world that is constantly changing, thinking ahead about risk can be essential to your investment and financial success.
1Diversification does not assure a profit or protect against market loss.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
SMRU #6144150 exp. 1/8/2026