Risk Off! It’s Time to Protect Your Portfolio from Growing Geopolitical Risk

As I sit here in Kiev, Ukraine, and see the chaos enveloping the world around me, I think it’s time to pound the table for investors to protect their portfolios.  American leadership is absent, other world powers are rising, and geopolitical tensions are reaching the breaking point.  Not to mention, the stock market is at all-time highs and the VIX is bouncing off traditional lows.

If there ever were a time when complacency ruled the day in the face of gargantuan threats over the horizon, now is that time.  I know the old Wall Street saying about climbing the wall of worry in the face of uncertainty, but I believe it pays to be prudent at this market juncture.

Let’s start with the situation in Ukraine.  It is obvious that the Russian president is hell bent on recreating not necessarily the former Soviet Union but rather the old imperial Russian empire.  The West seems unable to deal with this fact.  The end game is that the violence, unrest, and tensions between the Russian Federation, their Ukrainian supporters, and NATO will reach levels that most investors cannot yet comprehend.  This conflict will have negative reach into European markets and therefore globally.  This no- hot shooting war could manifest itself in reduced natural gas supplies to Europe and lead to contraction of the leading Western European economies.

At a minimum, Europe will have to spend more on defense at a time when deficits are still raging across the continent.  We could even see the conflict move into the Baltic states who are now members of the North Atlantic Treaty Alliance.  Then, all bets are off as then we could be seeing World War III.

The Obama administration has been touting a recent shift in American defense policy to Asia.  This seems premature at best and likely incompetent at worst.  But what have been the results of this policy?  China is rising and starting to flex her muscles garnered from a decade of increased defense spending as the Chinese economy overtakes the U.S.  Japan is starting to talk of rearming and growing its defense establishment in order to counter the new Chinese threat.  American Defense Secretary, Chuck Hagel, was recently given a tour of the new Chinese aircraft carrier as China strives to build a blue water navy to counter the United States globally.  North Korea is openly threatening our Asian allies with nuclear war and has even mentioned the western coast of the United States as it builds its ICBM capability.

I haven’t even begun to discuss the multiple flash points in the Middle East.  Iran is hell bent on developing nuclear weapons and openly threatens Israel, who will have to act on her own in self defense at some point.  Syria continues to be a flash point.  Iraq and Afghanistan are disintegrating into lawlessness again as America withdraws from the world stage.

All of the examples are reasons why investors, in my opinion, should reduce risk in their portfolio.  One can look at buying insurance through derivatives, looking for short-term yield opportunities, reducing equity exposure, adding precious metals as historical stores of value, and even just going to a larger percentage of cash.  The trick here is to be patient and wait for an opportunity to buy what you want when it goes on sale as there will definitely be an opportunity as some point in the near to medium term.  I know that typically it is very hard to time the market and most are not successful, but I believe the risk/reward ratio at this point in time on the geopolitical scene calls for risk off!