Asset Allocation Chart of the Month
Investing Through the Fog of War
Geopolitical shocks like war or a pandemic can trigger powerful emotional reactions in investors. At times like this, it is important for investors to separate headlines from long-term fundamentals. The closure of the Strait of Hormuz is serious. However, the global economy is far less dependent on oil than it was decades ago. Below we highlight several behavioral biases that investors may want to consider before pulling the trigger.
- Availability Bias. Dramatic events dominate attention. Constant news coverage can make risks feel larger and more immediate than they may be. When news flow is intense, there is a tendency to focus on worst-case scenarios simply because they are vivid.
- Probability Neglect. When emotions run high, people focus on how bad an outcome could be (“What if the Strait stays closed for months?”) rather than how likely it is. Low-probability but high-impact scenarios can begin to drive decision-making.
- Action Bias. Volatility creates the urge to “do something.” Doing nothing can feel irresponsible, even when uncertainty is highest and expected value of change is unclear. But making changes during peak uncertainty often reflects discomfort, not an unbiased evaluation of the facts we can observe (valuations, fundamentals, and time horizon) with the risks we cannot fully predict.
- Loss Aversion. Losses feel more painful than gains feel rewarding. If markets are falling, the urge to cut exposure increases, even if the original allocation thesis hasn’t structurally changed. Fear of further drawdowns can override a disciplined process.
- Narrative Fallacy. We naturally look for simple stories. “Iran controls the Strait, oil spikes, markets fall” is a compelling narrative. But markets rarely move in straight narrative lines. Policymakers respond, incentives shift, and second order effects emerge. A good story is not the same as a forecast.
- Home Bias/Flight-to-Safety Bias. Investors often gravitate toward domestic assets during global stress, assuming they are safer. While U.S. markets may be relatively less exposed to oil shocks, shifting allocations purely for comfort can introduce different risks such as higher valuations or rate sensitivity.
The Touchstone Asset Allocation Committee
The Touchstone Asset Allocation Committee (TAAC) consisting of Crit Thomas, CFA, CAIA – Global Market Strategist, Erik M. Aarts, CIMA – Vice President and Senior Fixed Income Strategist, and Tim Paulin, CFA – Senior Vice President, Investment Research and Product Management, develops in-depth asset allocation guidance using established and evolving methodologies, inputs and analysis and communicates its methods, findings and guidance to stakeholders. TAAC uses different approaches in its development of Strategic Allocation and Tactical Allocation that are designed to add value for financial professionals and their clients. TAAC meets regularly to assess market conditions and conducts deep dive analyses on specific asset classes which are delivered via the Asset Allocation Summary document. Please contact your Touchstone representative or call 800.638.8194 for more information.
A Word About Risk
Fixed-income securities can experience reduced liquidity during certain market events, lose their value as interest rates rise and are subject to credit risk which is the risk of deterioration in the financial condition of an issuer and/ or general economic conditions that can cause the issuer to not make timely payments of principal and interest also causing the securities to decline in value and an investor can lose principal. When interest rates rise, the price of debt securities generally falls. Longer term securities are generally more volatile. Investment grade debt securities may be downgraded by a Nationally Recognized Statistical Rating Organization to below investment grade status. Non-investment grade debt securities are considered speculative with respect to the issuers' ability to make timely payments of interest and principal, may lack liquidity and has had more frequent and larger price changes than other debt securities. Equities are subject to market volatility and loss. Growth stocks may be more volatile than investing in other stocks and may underperform when value investing is in favor. Value stocks may not appreciate in value as anticipated or may experience a decline in value. Stocks of large-cap companies may be unable to respond quickly to new competitive challenges. Stocks of small- and mid-cap companies may be subject to more erratic market movements than stocks of larger, more established companies. Investments in foreign, and emerging market securities carry the associated risks of economic and political instability, market liquidity, currency volatility and accounting standards that differ from those of U.S. markets and may offer less protection to investors. The risks associated with investing in foreign markets are magnified in emerging markets, due to their smaller and less developed economies.
The information provided reflects the research and opinion of Touchstone Investments as of the date indicated, and is subject to change without prior notice. Past performance is not indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. The indexes mentioned are unmanaged statistical composites of stock or bond market performance. Investing in an index is not possible. For Index Definitions see: TouchstoneInvestments.com/insights/investment-terms-and-index-definitions
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 800-638-8194. Please read the prospectus and/or summary prospectus carefully before investing.
Investment return and principal value of an investment in a Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
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