Diversifying geopolitics

Geopolitics has taken the market's focus. The U.S. and Israeli attacks on Iran caused uncertainty to rise and risk assets to suffer corrections in their valuations, although probably to a much smaller extent than most analysts anticipated.

While events like these raise particular concern, the evidence shows us that, first, the final effect is not always the one you intuited and, in addition, a well-structured and diversified portfolio should significantly mitigate the effects of these moments of global financial stress.

Doing a simple exercise, a portfolio that invests in equal parts in international stocks, local stocks, international bonds and local debt and that does not hedge the exchange rate has had a performance of approximately 0.1% positive since February 27, in pesos. This contrasts with the performance of some traditional risk assets separately. In the same period, world stock markets average a 2% decline, the U.S. index has fallen 0.6%, European stocks have depreciated 4.3%, Japan fell 4.2%, all measured in dollars. Meanwhile, the IPSA has fallen more than 5% in this period, in pesos.

No one can predict what the outcome and final effect of this or other stress events for the market will be, and that can be intimidating. The good news is that by diversifying correctly and with discipline, portfolios can withstand these kinds of moments without major consequences, especially for a long-term investor.

Column written by José Ignacio Villarroel for Diario La Segunda