How to war-proof your portfolio
The 1990s and 2000s were an unusually peaceful era by any historical standard. Since then, fatalities from organized violence in 2024 were nearly five times the level recorded in 2010. That said, even 2022, the deadliest recent year on record, was far better than the war-torn 20th century.
We looked at 120 years of conflict data, from World War I to last week. A few themes stood out.
Geographic concentration is the single biggest risk. If you held only Russian stocks in 1917, only Chinese stocks in 1949, only German bonds in 1923, or only Japanese stocks in 1945, you were wiped out. After World War I, for example, the German stock market lost 97% of its value in real terms as hyperinflation destroyed the currency.
Bonds perform badly during wars, on both sides. Governments borrow heavily to fund the fighting, and inflation destroys their value. War bonds of losing countries are among the worst asset classes in financial history. They almost always go to zero.
Geographic and currency diversification through index funds is the best hedge against this. US equities performed well through World War II. The American stock market bottomed in April 1942, right around the maximum territorial extent of Germany and Japan. Interestingly, markets on both sides identified the war’s turning points before anyone on the ground recognized them. The wisdom of crowds at work.
Governments will always prioritise their interests ahead of yours. If you hold assets in a country your nation is at war with, those assets become enemy property. The same happens to citizens from the wrong ethnicity like Japanese Americans in the US during World War II.
Governments will nationalise what they need to fund the war. Personal assets are no exception. Gold in bank vaults, domestic stocks, real estate, and valuable art have all been targets. You’re usually repaid in a currency that’s losing value by the day.
There are a few exceptions. Gold under your mattress can’t be seized. But there’s only so much you can hide. Productive farmland away from major cities is usually left alone, the more unassuming the better. Assets in neutral countries are out of reach. A diversified equity portfolio across geographies, with some allocation to these, is probably the best you can do.
None of this works if you start when the crisis hits. If you wait for the robins, spring will be over.
