For the past several weeks, a proposed summit between President Trump and North Korean leader Kim Jong Un seems to have been whimsically planned, cancelled, and re-planned. However, most recent developments suggest that the summit is confirmed and will go ahead as planned on June 12.
The North Korea summit saga, like other recent political issues such as tariff disputes, has a seemingly unclear outcome. While only time will tell what impact the summit actually has on the global economy, short-term developments can still have large effects on day-to-day market activity.
From impulsively planning and canceling a peculiar political summit to threatening to impose tariffs on trade partners before announcing improved trade relations, Trump’s politics tend to be polarizing. All of this volatility can be tricky when trying to focus on your investments, so let’s use our financial fluency tools to take a closer look at how to trade geopolitical issues.
Helpful Tips: Trading Risk
The North Korea summit issue is a perfect lens through which we can analyze how investors flee or flock to more risky assets in the face of political uncertainty. An investor’s risk profile can take many forms, but we’ll keep it simple for now and imagine there are just two types of investors: risk-seeking and risk-averse.
A risk-seeking investor takes on risk by investing in riskier assets with presumably higher potential for returns. On the other hand, risk-averse trading means you are mitigating risk in your portfolio by putting your money in safer assets that carry lower potential for return. The quickly-changing trajectory of the summit and the immense impact that its failure or success will bring with it forces investors to constantly reassess their risk profiles, creating undue volatility in the market.
Let’s look at the possible outcomes of the North Korea summit to better understand risk trading. There are two likely outcomes: the summit proceeds successfully and relations are improved, or it proceeds unsuccessfully and relations sour. When relations are good, more people practice risk-seeking trading and invest in riskier assets. When relations are bad, people fear conflict and the negative economic impacts associated with it. Hence, they tend to be more risk-averse and invest in safer assets. Simple.
Historically, an increase in political tension is positively correlated with risk-averse investing behavior. But Trump’s practice of “policy by tweet” has made these movements much more difficult for investors to see coming. Trump’s interaction with Wall Street is atypical when compared to that of other US presidents. His constant directional changes in policies and statements have introduced a significant amount of unnecessary volatility into financial markets. Trump’s revolutionary usage of Twitter to announce far-reaching policy decisions has created a more unilateral White House and an increasingly reactive Capitol Hill.
But how exactly will this affect my investments? Let’s take a closer look as we strive towards achieving financial fluency.
What’s This Mean for my Portfolio?
So, how can you use all of this political turbulence to your advantage? Stay informed and decide what level of risk you are comfortable with incurring. If you think the North Korea summit will happen, consider investing in risky assets like tech (IYW) and emerging markets (specifically Asia, in this case). If you think the North Korea summit will fall through yet again, consider putting your money in safer assets like gold (JNUG).
You can apply this methodology to many other major issues that deeply impact individual markets and the global economy as a whole. Scandals, trade wars, and nuclear threats all force investors to flee to safer havens, while calmed political negotiations and technological achievements draw those same investors to riskier assets.
Investors around the world will be watching the US-North Korea summit closely – so should you. By surrounding yourself with a greater understanding of the markets, you can continue to step closer to financial fluency.