Investing in a Messy World

As I read the early news reports about how the former Pakistani Prime Minister Benazir Bhutto was killed in an apparent suicide attack in the military garrison town of Rawalpindi, I was sickened. The news and subsequent images were shocking and disturbing, but the event was also a good reminder that not only do we live in a dangerous world, but as investors, we are constantly reminded that this messy world should be factored into our outlook.

As soon as the story hit the wires, stocks began to sell off. Clearly this was not as dramatic as the terrorist attacks of 9-11, or the subsequent terrorist bombings in Spain or London (all of which markets recovered from in fairly quick order). But the Bhutto murder clearly created an impact, especially in light of a light-volume, holiday-shortened week. Before the news hit the wires, stocks were pointing higher, but when the details of the story emerged, stock futures turned lower and continued to decline throughout the trading day.

I happened to be a guest on Fox Business News yesterday and one guest noted that Pakistan is not a particularly large US trading partner and has absolutely nothing to do with oil production. True enough, but it is a nuclear power and when video of riots there hit our airwaves, most people worried, “Who is in control over there?” The Pakistani turmoil reminds us of our dangerous world, which calls into question the safety of all of our investment assumptions and causes general anxiety. Clearly uncertainty is the enemy of investors. As more details emerged, investors sought safe havens like US Treasury-bonds and physical assets, like gold, both of which gained ground.

Perhaps when a senseless event occurs that throws the world and markets into a chaotic state, it is the best reminder that investors can only control so much. We do not know when the housing slump will end; when a corporate scandal might erupt; or when a geopolitical crisis will cripple some part of the world where the US has a significant interest. For that reason, it is imperative that investors maintain a disciplined approach to risk and create diversified portfolios that help weather the gyrations associated with investing in a messy world.