Is the escalating conflict with Iran something investors should worry about?
Global headlines about war, oil supply disruptions, and geopolitical tensions can make it feel like a major market crash is just around the corner. But are these fears grounded in probability – or simply possibility amplified by the news cycle?
In this episode of Retire in Texas, Darryl Lyons explores the investing skill of distinguishing between what is possible versus what is probable. Using the current tensions surrounding Iran and the Strait of Hormuz as a backdrop, Darryl explains how geopolitical events can influence markets through both economic effects and investor sentiment, and why headlines often exaggerate the real long-term impact.
Drawing on historical examples like Pearl Harbor and the assassination of President John F. Kennedy, Darryl walks through how markets have historically responded to major crises. While uncertainty can trigger short-term volatility, investors and institutions often shift quickly from panic to analysis, evaluating what events mean for economic growth, corporate earnings, and long-term investment opportunities.
You’ll learn:
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Why understanding the difference between possible and probable is a key investing skill.
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How geopolitical conflicts like tensions with Iran can affect markets and oil supply.
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What history shows about market reactions to major global events.
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Why missing just a few of the market’s best days can dramatically reduce long-term returns.
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How diversification, time horizon, and portfolio structure help investors weather uncertainty.
Darryl also explains why investors should be cautious about reacting emotionally to alarming headlines. Whether markets are responding to geopolitical tensions, economic concerns, or unexpected global events, long-term investors can benefit from maintaining discipline rather than trying to time the market.
This episode serves as a reminder that while uncertainty is inevitable in investing, markets have historically endured wars, crises, and disruptions because the global economy continues moving forward. With proper perspective, diversification, and long-term planning, investors can build resilience in their financial strategy.
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Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. And you’re listening to Retire in Texas. This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, obviously a lot is going on in the world.
I want to specifically talk about Iran, and I want to talk about something that I think is awfully understated. And it’s a skill set that some of you guys have developed and some of you haven’t, some of your spouses developed and some haven’t. And that’s just really determining, this is really an important investment skill.
I think it’s understated and even in business, and it’s determining what is possible versus what is probable and making sure that you understand the difference between the two. And sometimes they get crossed. So, is it possible that this escalating conflict in Iran is going to lead to a dramatic stock market collapse? Is it possible? Is it possible? Yes.
It is possible. Is it probable? Is it probable? No. And I’m going to go and unpack that a little bit more. The reality is, is that these headlines, they get so loud, they bully and push aside rational thought planning. And so, I want to reflect on a few things today. I want to reflect on, you know, what is happening in Iran right now, this massive storm system that’s approaching, so to speak.
So, what’s happening now? What does history say? Third, how our portfolio is built to weather this and then finally, how we should behave in this context. Some of this is just a review, but it’s a good review for a lot of you. For some of this might be the first time you’re hearing it. And so, let’s jump into it.
Let’s just talk about what’s going on today in Iran. And I want to talk. There’s really two layers to it. I think that it’s worth pointing out. You know, there’s the economic piece is very important. The Strait of Hormuz is a conversation piece that you probably have already heard about, but if not, it’s a narrow strip of water that’s responsible for facilitating 20% of all global oil supply.
So, if that isn’t functioning, then there’s a lot of people who aren’t going to be able to fuel their vehicles or for that matter, manufacture products like plastic. So, it begs the economic question that everyone’s asking is, will as a result of constricting this waterway because of global conflict, will oil prices spike? So, these are economic questions.
Will shipping slow down? We’ve all seen this shipping story before in some degree. A lot of people believe that that’s the catalyst for the inflation that we dealt with over the last several years. Will inflation come back? And then, of course, how does interest rates play into this? Because the Federal Reserve uses that interest rate lever to either accelerate or decelerate or do whatever it needs to do to manage the economy.
Questionable whether it works or not, but regardless, this potential roadblock of oil in the Strait of Hormuz is problematic. And I think people are just, and economists and managers are just trying to digest to what degree is it problematic. And getting their head around that. So that’s the economic piece. There’re layers to that. Then there’s the sentiment piece, which is the headline risk.
And so, these alarming headlines are interesting to me because you have institutional investors which are just the big institutions. Think Blackrock, think Goldman Sachs. And then you have retail investors, people who trade online. The retail investing group has grown over the years. So, when headlines happen, this is not always the case. But retail investors may be a little bit more emotional than institutional investors.
And so that could certainly cause some unwinding of the markets and causing some market sentiment, causing the market to go down a bit. It’s very emotional because whether you’re retail or institution, you’re collectively the market and the market does not like uncertainty. Uncertainty to the market is like rain on a Texas road. And no matter how much training that we have, we just tend to kind of freak out.
And if you’ve been on, I mean, you all have to some degree been on these roads. You’re like, man, people do not know how to drive in the rain. And it’s the same with the market, when the market sentiment kind of goes haywire and it’s usually measured by something called the VIX index. So, you can actually measure this.
You just don’t know what’s going to happen. You don’t know if there’s going to be this kind of what you call capitulation where, you know, one guy sells and then somebody else sells and then somebody else sells. And then it just kind of has this rolling effect, doesn’t necessarily concern me all together. But it’s something that does happen, and you just kind of have to weather through those moments where people freak out.
You just can’t be one of them. But that’s just what happens. And market sentiment is something to pay attention to. So, you have the economic piece of where we’re at today, and then you have the sentiment piece. Where is there going to be a catalyst where people just start selling, kind of a bank run? In those moments, you just have to breathe and let it kind of play out.
I’ll talk further about it, though, so I just won’t leave it there. But let’s talk about the second, I guess, my reflections on this. How is the market historically handled chaos? There’s a lot to say about this, so I’m trying to synthesize it in such a way that it’s not overwhelming to you guys, but it actually has less impact than you might think.
You have got to take into consideration one of the most historical events in our nation history. That’s December 7th, 1941, Pearl Harbor. What happened the next, yes, the stock market was around then, but what happened the next day? How much did the market crash the next day in Pearl Harbor? A surprise attack, global war beginning, already tensions there. What did the market do?
How far did it fall? The very next day it fell 4%. I thought you were going to say 40%. It fell 4%. What about, another big event? Many guys know where you were on this date. This was in 1963 when JFK was assassinated. The market fell 30% the next day? 20%? It fell 3% the next day. So, it doesn’t mean that the stock market, the collective groups of institutional retail investors, it doesn’t mean that they necessarily ignore tragedy.
It’s just they quickly move from like this shock to analysis. So, you have this degree of sometimes capitulation where people are just kind of selling indiscriminately because they’re nervous. But it doesn’t take very long for people to go, okay, now let’s, what’s the reality? Let’s breathe. Are there opportunities here? The adults in the room start to say, okay, what does this mean for our future economic growth?
What companies are going to be best in this environment? You would imagine you might shift from consumer discretionary to defense companies. So, you make some adjustments. How does this impact the company’s ability to make money? And then again, you know, looking at the Federal Reserve and the interest rates, which is always an interesting thought process as you think about your investing philosophy.
But markets move past headline surprisingly fast. So, we know this, we know this to be true, that that uncertainty is a certainty. It’s inevitable. And so, the reality is, is we have when you first started investing, whether you made this conscious decision or not, when you first started investing, you actually were making a vote of confidence, a vote for optimism.
So, when you first invested in this, in the collective markets, you were voting for optimism. And so, the reward for that investment is staying optimistic through the ups and downs. The price to pay is sometimes it feels very uncomfortable. I hope you follow that logic because that’s an important characteristic of good investing, which let’s talk about portfolio construction.
How should it be constructed. And so, it should be constructed with diversification. I’ll unpack that a little bit more, but let’s jump into, I’m going to talk about four guardrails here. So, I want to talk about risk tolerance. A lot of times when you start investing, whether it’s with PAX, or whatever institution you work with, you do these risk tolerance questionnaires.
And I think it’s like when you go to the doctor and you know, they’ll do blood pressure, they’ll check your blood pressure. They may, you know, draw vials of blood there, and then they’ll ask about your history. The risk tolerance questionnaire is one attribute to create, like painting a picture of how the portfolio and your investments should be constructed.
But it just is one attribute. And there’s many, many faults with risk tolerance questionnaires. They’re just very much art versus science. I’ve done thousands of them over the years. And so, I’m not a critic altogether. But I don’t place a ton of weight. There is a regulatory piece that is necessary. So, the regulatory bodies that allow people to invest in this regulated market demand a risk tolerance questionnaire.
They don’t demand that it’s perfect. They just demand that it exists. So, they always have to be built. But, if I could read into them in isolation, many of them will tell me a story about somebodies’ willingness to navigate the markets. The problem with them is that’s your willingness in a given point in time. And then when the time occurs, the market goes crazy.
I don’t know if that risk tolerance really matters. All that to be said, it still plays a role. And so, as you build out those risk tolerance questionnaires, you’ll find that your advisor oftentimes will revisit that and say, hey, you are 60% stocks, 40% bonds based on your risk profile. Which leads me to the next one. And this is in terms of portfolio construction, actually, let me double click on the last point.
Your portfolio construction is often a byproduct of your risk tolerance. Yes. But you can change that over time as you start to learn and get new information. So don’t forget that, because much of your portfolio’s growth is very likely going to come from the stock portion, because stocks historically have done significantly better than bonds over multiple time periods.
And so, you want to have that stock position in your portfolio. To me, I mean, generally speaking, I want it to be a good chunk of your money. If I could have every single one of our clients in 100% stocks, I would. But that’s not the reality. People have different time horizons, but I just have that much conviction that owning good companies over an extended period of time, with managers who have incentives to grow the company based on the track record of the stock market, is probably going forward going to be one of the better places to be.
I say probably because I can’t guarantee anything, but I really enjoy and appreciate the stock market, and so I want clients to have a good chunk of their money in stocks. But the risk tolerance sometimes will say no, we need to dilute it a little bit. And the one thing you don’t want to do is you don’t want to get in and out of the stocks.
In fact I’m looking at a chart from Invesco. I’ll put this in the client notes. If you were to invest $100,000 again, I don’t like to use a lot of numbers, but I am on this one. If you put $100,000 in the stock market represented by the S&P 500, in 1994, then if it had averaged 11% again, I’ll put this so you can have all the disclosures.
I have all the disclosures here that you can’t see, but I’ll put those in the show notes. But $100,000 in 1994, 11% rate of return, fully invested, not messing with it, not switching money lanes would be worth about 2.2 million, but had you missed the ten best days just by fiddling with it because you’re freaking out? Just the ten best days, it’d be worth $1,041,000.
So just by missing the ten best days, by fiddling with your money when you freak it out, that’s $1 million of disruption. So that’s a real, it’s a real issue. It goes on to say, and this charts a fascinating chart by Invesco. I’ve seen this before, but this is another iteration. If you missed 60 best days, your 100,000 would have not been worth 2.2 million like it should have been.
But it would have been worth 121,000. So, messing with your money is certainly problematic, especially if you’re in stocks. The third little guardrail there is time horizon. If you have a need for immediate income, then that money certainly has to be constructed in a way that doesn’t cause problems. In other words, if you are taking withdrawals from your money and the market crashes and you need money to pay your bills, that’s eating your seed and makes it hard for that money to come back.
So typically, we like to bucket money. But if you look at a lot of your money, I think you’ll be surprised that a lot of your money has a longer term time horizon than you think. You say, well, I’m retiring next year. Yeah, you may be retiring next year, but not all of your money is going to be needed for income immediately.
So, you do have a longer time horizon than you might give yourself credit for. And that should give you a permission slip to invest a little bit more in the stock market versus the other markets that are out there. And then finally, I’ll say diversification is another one of those guardrails. As you think about your portfolio, we think about it is like a core satellite.
We have a core model, and then you satellite it with things like, private equity, private debt, things like that. You want your international exposure, especially in times like this, to be probably 20%, although I’ve seen it 15 to 25. 19. I’m sorry, 2001, 2010. We were 50-50. But I want you to make sure that you do have a portion of your money in international equities.
And again, that needs to be tempered. And then if you do have more bonds then the idea for you, you’ve said I, you know, if the market crashes, I want to fall off the porch, not the roof. And so that’s what bonds are intended to do to kind of soften the landing. So, I had four reflections.
This is the fourth reflection. I know I’ve kind of man, I’ve gone a lot of places here. But the fourth reflection I have is how you should behave in this environment. First of all, I said this before. Don’t switch money lanes. I just talked about that with those charts from Invesco. That’ll really mess you up.
Especially when you start to freak out and you see headlines and these types of international events, they do tend to freak us all out because, they’re all different. And even as much as we like to reference historical events and say, and we always say, well, we don’t always say, many people say this time it’s different, that phrase causes people to make decisions that are often justified but very dangerous.
So how should we behave? I think it’s just being very careful of switching money lanes, just like you would switch lanes in Austin and only end up in a slower lane. Also, the other thing to think about it, and this is, I think important piece, is that active managers play a role in making the market make sense.
Now your portfolio might be all passive. I’ll get into that in another show. Passive meaning you usually have lower costs in your business strategy. Frankly, many of you probably have passive. So we can kind of lower the cost. But some of you guys might have active managers. And those active managers go shopping during chaos. I know Goldman Sachs just came out with an article that said that they, this is, they said that geopolitical driven market dips may actually be opportunities to buy quality companies at better prices.
So, there’s plenty of active managers that go shopping. And that’s why the market works. So, when it goes down people buy when it’s on sale. And that’s why it comes back. Your goal in all of this is if you have active managers, is to allow them do their job. If they’re passive, then you’ve decided that you know, you want the lowest cost possible and you just need to weather this through.
So, the original question, is it possible that these escalating tensions will lead to total market collapse? Yeah. I mean, yes, it’s possible. Is it probable? I don’t know. History suggests otherwise. Markets, you know, just survive wars, economic crisis. They survive pandemics. People still need, the reason they do is because people still need tires and toilet paper and iPhones and they go to movies and, you know, we buy stuff.
And so, because we still buy and consume things, the market tends to weather these events. And it’s just important that we have built up some resilience. We’ve diversified. We have proper perspective, long term planning. And we’re wise in the decisions we make. I think that it bodes well for being a financial advisor because we really love walking alongside of you guys during these times.
And we want to hear from you if you’re struggling or concerned. We want to make sure we talk through these things. So be sure to reach out to your financial advisor. Just have a conversation and just make sure that things are aligned given the volatility. And having a better understanding of your money does help you weather this.
But most importantly, as I land this plane, you think different when you think long term. Have a great day.
Resources:
https://www.wellington.com/en/insights/war-and-markets-whats-the-connection
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