When things heat up, keep a cool head.

War, pandemic, financial crisis. These events can trigger crises that cause suffering and have a noticeable impact on your portfolio. So, how should investors best deal with such events as a new war breaking out, such as the one currently in the Middle East, or an economic crisis beginning, causing prices to fluctuate wildly?

Over the past 20 years, we have witnessed many events that have been felt worldwide: The financial crisis of the noughties, the European debt crisis, the pandemic and the outbreak of war in Ukraine. Financial markets have always reacted sensitively. Price volatility reflects the fact that no one knows what the consequences will be. It is no different in the current Iran crisis.

After all, markets are a bit like a regulars' table: different opinions come together there. In a pub, there may be no consensus. In the financial markets, however, all these opinions, expressed as buy and sell orders, combine to determine the price.

Patterns of the crisis

Such periods of uncertainty are part and parcel of investing. Nevertheless, even professionals can struggle when a crisis erupts. After all, they know the patterns. Equities fall in price because sellers dominate. Safe bonds are in demand and rise in price, which is why bond yields fall. The US dollar and Swiss franc gain in value. This is exactly the pattern that the financial markets followed in their initial reaction to the attacks on Iran.

But what should investors do in such a situation? The simplest option is to do nothing. Prices on the financial markets fluctuate, sometimes more than others. Of course, nobody is indifferent to losing five per cent in a single day. This triggers a reflex in many people to take action. The trick is to control this reflex.

The following example illustrates why. Imagine someone has been on the moon for 20 years with no news from Earth and has left their securities account untouched. Upon their return, its value has increased significantly, despite no action having been taken. Would this person be annoyed at not having sold their equities at the start of the pandemic? No, because it pays to be invested.

Over a longer period and at the level of the entire market, Swiss equities have delivered average annual returns of around 7 per cent – including years of losses – while debentures have yielded around 4 per cent. Another example that supports this argument is that had one invested in the US S&P 500 index 30 years ago and missed the five best days, the investment would have risen in value by only half as much.

A second option would be to sell part of the equities portfolio. However, to do this, one would need to be ready to act when the markets open following the arrival of bad news. If everyone sells at the same time, prices fall further. Often, an upward movement follows, which would be a more suitable time to buy. However, the question arises as to when to re-enter the market.

Three tricks

The best approach is to prepare during prosperous times using three strategies, so that the option of 'doing nothing at all' is easier to adhere to.

1. Before investing, write down your savings target and the allocation ratios for equities and bonds. Before making any hasty changes to your securities account, refer to this document and think carefully about your decision.

2. Review and restore these ratios at regular intervals.

3. Invest regularly, which is particularly easy with savings plans that use exchange-traded funds (ETFs). This way, you will automatically buy shares when they become cheaper.

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