For buy-and-hold investors in the U.S. stock market, it’s almost as though the war in Iran never happened.
If you’ve held broad index funds that mirror the market, you will probably find that it’s been a decent year so far, with positive returns for the benchmark S&P 500 stock index and for most of its sectors. That may seem astonishing because of the war and the periodic sharp financial losses it’s inflicted.
There has been chaos in the oil markets, and the roller coaster for stock investors might plunge again at any time. Still, some basic investing wisdom has held true so far: For those with long horizons, just sticking with the markets has generally been a good move, even when the markets act up. That’s been the case whether the problems stem from war, pandemics, politics or nearly any other abrupt event.
As I pointed out near the start of this war, the U.S. stock market has usually fared well after recent wars, and over the long haul. That said, markets are often volatile while a war is underway, and that’s certainly been true this time. The markets dropped sharply in March, but then regained lost ground in a rally earlier this month. In just 11 trading days in April, the S&P 500 rose more than 10.7 percent and reached a new peak, more than erasing the losses sustained in the early weeks of the war.
There’s no guarantee that this market resilience will continue. The economic damage caused by the war is far from over. It might be wise to consider the market recovery as a reprieve — an opportunity to review some investing fundamentals and get ready for the next storm.
The Numbers
There’s no doubt that, most of the time, buy-and-hold investing has worked well in the United States.
First, consider the big picture.
Since the end of 1927, the S&P 500 and its predecessors returned 9.8 percent, annualized, including dividends, according to Bloomberg. There were terrible stretches within that long expanse, including the Great Depression. But those able to stick with the market over long periods made great fortunes.
Long-term returns have flagged a bit since the start of 2000 — thanks largely to the dot-com crash and the financial crisis of 2007 through early 2009. Even so, the S&P 500 returned 8.1 percent, annualized, with dividends, according to Bloomberg.
Next, consider the investing record after recent wars.
I looked at this in March, using data compiled by Jeffrey Yale Rubin, the president of Birinyi Associates, an independent stock market research and investing firm in Westport, Conn. Mr. Rubin focused on U.S. wars since the start of 1991 that lasted at least one day. He found that in the 12 months after the start of such wars, the S&P 500 rose 12.5 percent in price, on average. That compared with an annualized gain of 9 percent over that entire period. In other words, in the year after a shooting war started, the U.S. stock market performed even better than it did over the entire period.
Now, here’s an update. Mr. Rubin examined S&P 500 performance in the seven weeks after the first U.S. attack in all these wars. There have been nine, beginning with Operation Desert Storm, the U.S.-led war to drive the Iraqi forces of Saddam Hussein out of Kuwait in January 1991.
On March 2, the first trading day after the start of the current war, the index fell 0.8 percent. For all the wars, on average, it rose 0.8 percent.
Through Friday, April 18, the first seven weeks of trading in the current war, the S&P 500 rose 3.6 percent. That compared with an average price gain over seven weeks of 7.2 percent for all these wars.
In an email, Mr. Rubin pointed out that from this particular vantage point, the S&P 500’s net performance, while decent, wasn’t all that impressive. “It could be argued the stock market’s reaction is below normal” this time around, he said.
While traders care deeply about split-second market movements, this time period is far too short to make a meaningful comparisons if you are a long-term investor. The decades ahead will really matter.
Asset Allocation
There’s no assurance that the future will resemble the past, of course.
It’s possible that the world is meaningfully different now — that it has become much riskier because of any manner of things, including the war; President Trump’s policies on issues like tariffs, cryptocurrency, financial deregulation, Greenland and NATO; and, perhaps, because of the growth of a powerful and potentially dangerous new technology, artificial intelligence.
How to deal with such matters goes beyond the scope of a single financial column. But if you are worried as an investor, and crave greater safety, traditional finance provides some time-tested remedies.
They fall under the rubric of asset allocation and are fairly straightforward: If you want greater security, lighten up on riskier assets and emphasize safer ones. Move in the opposite direction if you are willing to bear more risk in the hope of greater rewards.
The major assets traditionally available to investors are stocks, bonds and cash, in descending order of risk. Tweak the proportion of these assets in your investments — or portfolio — to adjust the risk you are comfortable facing. And by cash, the safest asset, I mean money held in secure places like bank accounts, preferably interest-bearing ones, that are backed by the government, or in money market funds invested in U.S. Treasuries or in certificates of deposit, or similar, reliable instruments.
Try to put aside enough cash to pay the bills first. Then use cheap, diversified index funds for your core stock and bond holdings.
What You Might Do
Just matching market returns with index funds has produced excellent results historically because the markets have risen over the long haul. The main reason they have done so is that despite many setbacks, corporate profits have tended to rise along with the economy. Nothing is certain, but, at the moment, the Wall Street forecast is for excellent profits in the months ahead, propelled, to a large extent, by investments in A.I.
Index funds won’t give you the best possible performance. The highest-performing stock in the market will do that. Over the last decade, according to FactSet, that has been Nvidia, with a return of roughly 22,000 percent, around 70 times the return for the S&P 500. If you can find that one stock and stick with it, congratulations. Few investors manage to do that, year in and year out.
Because the stock market fluctuates wildly — and has done so since the start of the war with Iran — it’s easier to cope with stocks if you have safer investments, too. That’s where high-quality bonds come in. They aren’t perfect, though. Bond prices and interest rates move in opposite directions, so if the underlying bonds within them fall in price because interest rates in the overall market have risen, bond funds can lose money, too. That happened during the inflation and interest rate surges of 2022, and many bonds have lost a small amount of value during this war.
The war set off increases in energy prices. Gasoline and a host of other consumer products have become more expensive. Inflation and interest rates may well rise further. Nonetheless, unless you need to sell your bonds or bond funds at an inopportune time, both should be fine as long-term investments.
How much of your money should be in stock and how much in bonds is an important question. The classic answer is found in the so-called 60/40 portfolio — with 60 percent stocks and the rest in bonds or cash. This arbitrary proportion is a reasonable starting point, taking into account the greater long-term returns of the stock market and the relative stability of the bond market.
Those who can cope with greater risk — often, people starting out in the work force — may want far more stock than that, while retirees, who can’t afford to lose money, may be better off with far less.
Target-date retirement funds, which are default options in many workplace retirement accounts, make some of these choices for you. For example, the Vanguard Target Retirement 2070 Fund has 90 percent stock and the rest bonds, all contained in underlying index funds. At the other end of the spectrum, the Vanguard Target Retirement Income Fund, for those in retirement, holds roughly 70 percent bonds.
Diversifying further, with international stocks and bonds, makes sense, too. Some readers have asked how to do this. I’d look for diversified international index funds from major providers, like Vanguard, BlackRock, State Street and Fidelity. Beneath the hood, many target-date funds include international funds within them, too.
Setting up your asset allocation is likely to be far more important for your financial future than figuring out how the war in Iran might affect the stock market in the year ahead. Protect yourself as best you can.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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