Should I change my portfolio because of the conflict in Israel? – 10/09/2023 – From Grain to Grain

After the outbreak of the conflict in the Middle East over the weekend, I received some emails asking what to change in the investment portfolio. The war in Ukraine hasn’t even cooled down yet and yet another one scares the world. Wars bring additional uncertainty to economic variables. However, do they justify rebalancing the portfolio?

Before commenting on the question, I would like to highlight that I do not want to minimize the relevance of the conflicts here, much less point out who is to blame.

Returning to the initial question, the answer is it depends. It depends on how you guide and monitor your asset allocation and your investment horizon.

As I mentioned, any conflict around the world, at the very least, increases uncertainty and consequently volatility in asset prices.

Therefore, if your horizon is short-term, that is, less than a year, you should no longer be exposed or have very low exposure to risky assets and have a high concentration of post-fixed fixed income.

Those who follow me know that I have mentioned that for a one-year horizon, assets referenced to the CDI are still an excellent alternative.

Therefore, if you are allocated this way, there is nothing to change in your portfolio.

If your horizon is long-term, that is, more than five years, and you look at the profitability of your portfolio every month and also want to earn every month from the CDI, then you are already wrong to begin with. Perhaps your profile is more conservative than the one adopted or you should have a short-term horizon. In this case, consider adapting your portfolio to your real investor profile.

However, if you really have a long-term horizon, then you certainly have greater exposure to assets referenced to the IPCA as a central element of your portfolio. I have been drawing attention to this central exhibition since the beginning of the year.

Conflicts, in general, promote scarcity or difficulty in accessing some goods produced in the region. In the case of the current conflict, oil is the biggest risk. A rise in oil prices could increase inflation.

Therefore, inflation-referenced assets are an excellent hedge in your portfolio against conflicts around the world. And this exposure should not be changed at this time.

Continuing with the long-term investor, his exposure to risk, supposedly, should already be adequate to his investor profile and occasional increases in volatility should not be a subject of fear, but of eventual complementation if there is still room.

Whether as a result of war or any other event, the financial market is always subject to surges in volatility. Therefore, you should always maintain a portfolio with risk appropriate to the possibility of these occurring.

Only with a change in the long-term economic scenario should a portfolio be changed or when asset prices have already moved beyond what is due in relation to the scenario.

Therefore, with long-term thinking, fixed income products referenced to the IPCA or pre-fixed with a high interest rate (above 14% per year) continue to be the alternatives with the best balance of return per risk.

Therefore, be careful not to let yourself be kidnapped by the fear caused by the high media exposure of events. When this occurs, you will commonly sell low and then buy high.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

Speak directly to me via email.

Follow and like De Grão em Grão on social media. Follow investment lessons on Instagram.

LINK PRESENT: Did you like this text? Subscribers can access five free accesses from any link per day. Just click the blue F below.