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Short Summary
Main recommendation: Diversify globally across stocks and bonds, and only take as much risk as you can handle, because war-driven market losses are real but historically unpredictable, so market timing around wars is likely a losing game. Stocks and bonds have both suffered severe real losses in wartime, yet global diversification has held up far better than investing concentrated in individual countries.
Key Points
- Wars and financial markets have been intertwined for centuries: countries that lost major wars saw their markets decimated, while global markets were relatively resilient even through major conflicts.
- Historical relationships between war and markets varied from war to war, so past patterns are a poor predictor of future outcomes.
- International crises (440 recorded from 1918 to 2002) reduced world stock returns by about 4% per year, with the strongest reactions when crises involve territorial threats, threats of grave damage or existence, superpower involvement, or violence.
- Bonds fared worse than the "safe asset" reputation suggests: US long-term government bonds lost 67% in real terms from December 1940 until 1991, and UK long-term government bonds lost 74% from October 1946 until 1974.
- The worst global stock drawdowns occurred largely in peacetime, including the 1929 crash (54%), the 1973 oil shock (47%), the 2000 internet bust (44%), and the 2008 crisis (41%), so volatility is not unique to wars.
Details Worth Noting
- Concrete instructions: Diversify across stocks and bonds, diversify bonds globally, and use low-cost index funds. Plan for bad times in advance rather than reacting to them, and take only as much risk as you can handle, especially in bad times. Avoid tactical asset allocation or market timing based on war expectations, since the video describes this as usually a losing game. Use diversification across multiple sources of return, such as small-cap and value stocks, which the video says have historically dampened volatility, reduced extreme drawdowns, and increased recovery speed after crises.
- Germany's stocks dropped more than 90% in real US-dollar terms by 1922 after World War I, and Japan's stock market lost nearly 99% in real USD terms during and after World War II.
- An investor who held German stocks through the post-WWII period could have nearly tripled their initial investment by 1952, while Japanese stocks took until 1969 to recover USD purchasing power from a 1939 investment.
- Globally diversified stocks lost only about 15% in real USD terms during World War II, versus the severe losses in individual countries.
- German bonds lost all their value during the 1922–23 hyperinflation, and US and UK long-term bonds took decades to recover in real terms.
- Per Niall Ferguson, there is no simple recurrent pattern in how wars affect markets, and investors who learned lessons from one war often made new mistakes in the next.
- Global stocks returned a real 5.2% (about 8% nominal) over the 121-year period cited, despite major wars, revolutions, depressions, and pandemics.
Bottom Line
Wars can hurt markets severely, especially for countries on the losing side, but the sensible response is a durable, diversified plan you can stick with rather than trying to predict or time conflicts.
