How To Manage Geopolitical Risks as an Investor

How does geopolitical risk affect the financial markets?

Geopolitical risks like wars, terrorism, and rising tensions between countries—or even the threat that such events might occur—can disrupt how nations work and trade with each other. Here are some of the ways geopolitical events affect markets.

• Supply chain issues: Conflict can force ships and planes onto longer routes. Shipping costs rise, and deliveries of everything from fuel to fertilizer slow down. 
• Energy price fluctuations: When oil or gas supplies are cut off, countries that import energy face higher costs that ripple through almost every industry.
• Tariff and trade policy uncertainty: A sudden change in trade rules makes future costs hard to predict. As a result, businesses may hold back on spending, and markets might get jumpy worrying about corporate profits.
• Currency movement: When a country pays more for imports or investors pull their money out, its currency can weaken.
• Rising inflation and interest rates: Spikes in energy and food prices can push inflation higher. Central banks may raise interest rates in response, which makes borrowing more expensive and can slow the economy. 
• Lower corporate earnings: Higher costs, squeezed consumers, and disrupted trade eventually show up on companies' bottom lines—and potentially on share prices.

How to avoid the panic-selling trap

Panic selling is what happens when fear takes the wheel. As asset prices drop, investors brace for more losses and sell in a hurry. But selling only turns a temporary loss on paper into a permanent one. 

And since markets don't announce when they plan to bounce back, panicked sellers often miss some of the markets' strongest recovery days.

It's important to remember that volatility is a normal feature of markets, which have absorbed wars, energy crises, trade battles, environmental disasters, and health crises many times before. 

But as stressful as the situation may seem at the time, markets tend to rebound. Looking back over the past 20 years, research shows that some of the best trading days happened within two weeks of the worst days. 

Financial management over time

Zoom in on any turbulent month and a market chart looks like a heart rate monitor. Zoom out over decades and the major stock markets have trended upward, with the dips shrinking into wobbles.

That's why sitting out of the market can cost more than staying in. Recoveries come in short, unpredictable bursts: for example, an analysis in November 2023 showed that a 14% gain in the S&P 500 over the previous 10 months came from just 8 trading days. 

Miss a few of those while waiting for things to “calm down” and your long-term returns take a lasting hit. The bottom of a downturn is only obvious in the rearview mirror.

How different sectors respond to geopolitical events

A geopolitical shift won't hit every corner of the market equally. Here's how some industries may respond.

• Energy and commodities: Prices for energy and other commodities often increase when supply routes are threatened. That hurts countries and companies that buy these commodities, while some producers may benefit.
• Defence and infrastructure: Global tensions tend to increase government spending on security, which can lift defence stocks and related sectors.
• Technology stocks and growth stocks: Because tech products rely on parts made around the world, like computer chips, supply chain disruptions can delay production and raise costs. Similarly, higher interest rates can make it more expensive for businesses to borrow the money that allows them to grow.
• Bonds and defensive sectors: Companies with mostly local operations—think utilities and health care—tend to be less exposed to global turmoil. And assets like government bonds and gold have traditionally been where nervous investors wait things out.

Strategic rebalancing vs. emotional trading

Emotional trading when markets pull back can have unintended consequences, but some selling during volatility can be beneficial. What matters is why you're selling. 

For instance, planned rebalancing can help bring your portfolio back to your target mix and ensure you're well positioned for when markets recover.

Here are a few principles that can help you stay on the strategic side of that line.

• Time horizon matters: Money you won't need for decades can ride out market volatility; money you need next year can't.
• Diversification spreads out risk: A portfolio that includes a mix of regions, sectors, and asset types is more resilient to any single geopolitical event.
• Dollar-cost averaging smooths the ride: Investing a set amount on a regular schedule—regardless of what markets are doing—removes the pressure of guessing the right time to buy.

Guardrails for your investment portfolio

A few practical habits can protect you from your worst instincts during volatile periods.

• Revisit your risk tolerance: If market swings are keeping you up at night, your portfolio may be riskier than you can live with. Adjust deliberately, not in a panic.
• Avoid checking portfolios obsessively: The more you look, the more losses you'll see, and the stronger the urge to act.
• Rebalance intentionally, not reactively: Make changes on a schedule or at preset thresholds, not because of the day's news.

Volatility and taxes

A downturn can have one silver lining: it may help reduce your income tax bill. When you sell an investment at a profit in a non-registered account, you may realize a capital gain, a portion of which is taxable.

But if you sell other investments at a loss, those capital losses can be used to offset the tax bill on any realized gains in your portfolio. If your losses exceed your gains, they can be carried back up to three years or carried forward indefinitely. This is called tax-loss selling or tax-loss harvesting. 

(Note that investments held within registered accounts, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), are sheltered from tax on capital gains, so this applies to non-registered accounts only.)

One catch is the superficial loss rule (also called the 30-day rule). The Canada Revenue Agency (CRA) will deny your loss if you (or someone affiliated to you, like your spouse or a company you control) buy the same or identical investment within 30 days before or after the sale—and still own it 30 days after the sale. 

The risk? The market may recover before that, which means you could miss out on potential growth.

Keep calm and carry on

Successful long-term investing isn't about predicting the next crisis. It's about not letting any single crisis rewrite a sound plan. So, when the next shock hits, treat it as a test of discipline rather than a signal to abandon strategy. 

Review your plan, check your guardrails, and take advantage of tax-planning opportunities in cases where you must sell at a loss.