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Investment strategy revealed: How to protect your investments against geopolitical drama

by , 06 August 2014

When it comes to preparing your investments to weather any storm, the good news is there are things you can do to help offset your risk.

In financial lingo, investors call this hedging. Hedging is just a way of diversifying your portfolio. And hedging your portfolio reduces some of the risks facing it.

So what if geopolitical events intensify? What can you do to ensure your portfolio doesn't suffer in the process?

Read on to uncover what you can include in your investment strategy…

Geopolitical events aren’t all bad news for the stock market

As the Russia/Ukraine situation continues, this just goes to show that a geopolitical event can change very quickly in a short space of time,

The strange thing is, a lot of the time, intensifying geopolitical events can actually benefit the stock market. You may be wondering why this is the case…

Well events like this are actually good news for certain stocks, Bengt Saelensminde in The Right Side explains. It acts like a mini stimulus programme for some industries, such as the defence sector.

For example, in the 1970s, there were a number of oil shocks. Issues in the Middle East led to this.  

The oil price spiked, which led to high costs for consumers and energy-dependent industries. But through this period, oil companies benefited the most. Their profits soared.

When something bad happens, there tends to be a sector that benefits from the crisis.

The problem here is pinpointing the sectors that will do well. It’s a risky strategy to follow.

So how can you protect your portfolio? You need to own gold.

When geopolitical tensions rise, gold tends to benefit. Its price has a tendency to rise. Once the drama is over, the gold price then falls as risk abates.

Why does the gold price react like this?

It’s all down to the establishment of the currency system after the Second World War. This currency system relies on international co-operation.

If trust breaks down between countries, it could be the start of something else. And until there’s certainty in the market, gold benefits.

Gold protects your portfolio against the unknown. It’s the ultimate portfolio insurance.

If you include gold as part of your investment strategy, should stocks and other investments fall in value due to geopolitical drama, the performance of your gold holdings should help offset this.

So there you have it, an investment strategy to protect your investments against geopolitical drama.

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Investment strategy revealed: How to protect your investments against geopolitical drama
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