When the World Catches Fire, What Happens to Your Portfolio?
A self-directed investor's playbook for navigating geopolitical shocks without panic-selling or making bad bets
Turn on financial news during a geopolitical crisis and you get one of two things: talking heads screaming that the world is ending, or other talking heads calmly reassuring you that “markets are resilient” and you should “stay the course.” Both are useless. One makes you panic. The other makes you complacent. Neither tells you what to actually do.
Here’s the thing nobody on television wants to admit: geopolitical shocks are among the most predictable events in investing not in terms of when they happen, but in terms of how markets respond to them. There is 80 years of clean data on this. And the data tells a story that is simultaneously reassuring and, if you know how to read it, genuinely actionable.
The world right now feels like a lot. You’ve got active military conflict, oil price volatility, a Fed that doesn’t know whether to fight inflation or support growth, and a stock market sitting near all-time highs while headlines scream chaos. Every investor I know is asking the same question: should I be doing something?
This article gives you the framework to answer that yourself without panicking, without freezing, and without making the mistake that costs most retail investors a decade of compounding.
The Misconception: Geopolitical Risk = Market Risk
Most people treat geopolitical events as if they were financial events. They see a conflict escalate on the news, watch futures drop 2% overnight, and assume the fundamental value of their portfolio has changed. It hasn’t. Not yet, and probably not ever unless the conflict meets a very specific set of criteria we’ll get to in a moment.
Analyzing two dozen major geopolitical events going back to World War II, the average one-day return at the onset of a geopolitical shock is -1.1%. The average total drawdown across all events is only -4.7%, with markets typically bottoming in about 19 days and fully recovering within 42 days.
Read that again. The average geopolitical shock produces less of a drawdown than a bad earnings season for a single stock and it heals in six weeks. According to Hartford Funds research, the S&P 500 was higher one year after the onset of conflict roughly 70% of the time, with an average one-year return in the high single digits.
So why does it feel so catastrophic in the moment? Because our brains are wired to confuse narrative intensity with economic impact. A war feels like it should destroy portfolios. History says otherwise with one crucial exception.
The Framework: Two Types of Geopolitical Shock
Not all geopolitical events are equal. The data reveals a clean split that almost nobody explains properly.
Type 1: Pure Uncertainty Shock
This is the vast majority of geopolitical events wars, assassinations, terrorist attacks, political coups. The initial response is a sharp volatility spike driven by fear and uncertainty. But since these events don’t fundamentally alter the earnings capacity of the companies you own, six-month and 12-month subsequent returns after geopolitical shocks are essentially identical to average returns during periods with no notable geopolitical event. The market processes the uncertainty and moves on.
Think Pearl Harbor. The Dow fell 6.5% in four days. But the market began recovering in 1942, buoyed by wartime production and by 1945, the DJIA had rebounded significantly. The war was real. The fear was rational. The long-term damage to a diversified equity portfolio? Nearly zero.
Type 2: Supply Shock
This is the dangerous one and it’s dangerous in a specific, identifiable way. The 1973 oil price shock is the cleanest historical example of a geopolitical event doing lasting damage to equity market returns. Oil remained in short supply for an extended period, producing stagflation high inflation alongside deteriorating growth which stopped the economy from operating efficiently for years.
The critical distinction is this: a Type 2 shock doesn’t just create uncertainty. It physically disrupts the inputs that the economy needs to function. When those inputs stay disrupted for months or years not weeks the damage to corporate earnings is real and lasting. The two geopolitical events that caused double-digit S&P losses were both oil shocks: the 1973 Yom Kippur War and Arab oil embargo (-16.1%) and the 1990 Iraq invasion of Kuwait (-15.9%).
The single question that separates a Type 1 from a Type 2 shock is this: does this event durably disrupt the supply of something the global economy fundamentally needs? If the answer is no, your default should be calm. If yes and specifically if energy supply is involved you need a different playbook.
The Math: What “Staying Calm” Is Actually Worth
Let me put numbers on the cost of panic versus composure, because this is the part that should change how you behave forever.
Imagine you had $100,000 invested in a broad index fund in February 2022, the week Russia invaded Ukraine. Every financial news channel was apocalyptic. Within a few weeks, your portfolio was down roughly 8–10%. Let’s say you sold in panic at -10%.
Here’s what actually happened next: after Russia’s invasion shocked global energy markets in 2022, additional oil supply rapidly came on stream and the economic impact was far less severe than the 1970s counterpart. Markets recovered. An investor who held their $100,000 through the drawdown without touching anything would have been at roughly $110,000+ within 12 months. The investor who sold at -10% locked in a $10,000 loss and then had to decide when to get back in almost certainly after missing the recovery.
That’s not a hypothetical. It’s the documented outcome of every Type 1 shock in the data. The cost of one panic-sell decision, compounded over 20 years at 8% annually, is roughly $46,000 on a $10,000 mistake. Emotional discipline is the highest-returning investment strategy available to retail investors and it costs nothing.
Now here’s the flip side. Composure during Type 2 shocks is not the right strategy. During the 1973 Arab oil embargo, a disciplined “stay the course” investor watched the S&P 500 fall 16% and then languish for six years before recovering. Doing nothing during a supply shock is not discipline it’s denial.
The framework therefore gives you a checklist, not a blanket rule.
The Checklist: 5 Questions Before You Touch Anything
When a geopolitical shock hits and your portfolio is flashing red, run through these five questions in order before making any decision.
1. Does this durably disrupt global energy supply?
This is the single most important question. If the conflict involves a major oil-producing region and credible supply disruption (not just price spikes, but actual supply removal), treat it as a potential Type 2 event and reassess your energy exposure. If not, proceed to question 2.
2. Does this affect the specific revenue streams of my holdings?
Think about your actual positions. A tech company earning 95% of revenue in USD from US and European enterprise customers has essentially zero direct exposure to a conflict in the Middle East. A luxury goods company dependent on Chinese consumer sentiment has enormous exposure to US-China trade tensions. Geopolitical risk is not uniform it’s portfolio-specific. Map the exposure concretely before doing anything.
3. Is the fear already priced in?
Markets have historically held up well during geopolitical shocks, showing relatively minimal drawdowns and quick recoveries. This is partly because institutional investors price in risk before retail investors react. By the time you’re reading the headline, the fast money has already moved. If the market is down 3% on news, the question is not “should I sell?” but “is 3% the right price for this risk, or is the market overreacting?” Usually, it’s overreacting.
4. Is this a sentiment contagion or a fundamentals contagion?
Sentiment contagion is when unrelated stocks sell off because the market mood is fearful. Fundamentals contagion is when actual earnings are being impaired. Sentiment contagion creates buying opportunities. Fundamentals contagion requires genuine portfolio review. The way to tell the difference: are companies in sectors with no exposure to the conflict also selling off? If yes, it’s sentiment and sentiment recovers.
5. What is my time horizon?
If you need this money in 12 months, geopolitical volatility genuinely threatens your capital. If your horizon is 5+ years, history is unambiguously on your side. A survey of various studies found that approximately one year after a geopolitical event, markets bounce back between 7% and 10% around at least 65% of the time. For long-horizon investors, geopolitical drawdowns are almost always noise.
Three Stocks That Illustrate the Framework in Real Time
The current environment with active Middle East conflict and a defense spending supercycle already underway creates a fascinating live case study in geopolitical investing. Here are three stocks that illustrate different positions on the risk/opportunity spectrum right now.
Lockheed Martin (LMT) The Obvious Winner Nobody Wants to Call
Lockheed Martin surged 44% in three months, outperforming both the broader aerospace and defense sector and the S&P 500, driven by strong fundamentals and geopolitical demand. The company posted 9.1% year-over-year revenue growth in Q4 2025, with a record $194 billion backlog.
Here’s the non-obvious insight: Lockheed is not a “war stock” it’s a budget stock. The real driver of its earnings isn’t whether a specific conflict escalates. It’s whether the US defense budget keeps growing. And defense budgets have a structural tailwind that has nothing to do with any single conflict: global defense spending is projected to reach $3 trillion by 2028, with the FY2025 DoD budget request at $849.8 billion up $100 billion from FY2022. The geopolitical backdrop doesn’t create Lockheed’s opportunity. It accelerates a trend that was already in motion. The risk, counterintuitively, is that the stock already knows this at 30x earnings after a 44% run, you’re not buying Lockheed cheap.
RTX (formerly Raytheon Technologies) The Overlooked Second-Tier Play
While everyone focuses on Lockheed, RTX and its subsidiary Raytheon are among the primary manufacturers of weapons systems being actively deployed in the current conflict, including missile systems that are being consumed at rates that will require significant restocking. RTX has a critical structural advantage over Lockheed that most retail investors miss: it straddles both defense (Raytheon) and commercial aerospace (Collins Aerospace, Pratt & Whitney). This means it benefits from defense spending and from the ongoing post-COVID recovery in commercial aviation two independent growth engines running simultaneously. The longer a conflict lasts, the more the US needs to replenish and fortify military capabilities, and RTX is central to that restocking cycle.
Procter & Gamble (PG) The Geopolitical Shock Absorber
This is the one nobody talks about but everyone should understand. P&G diapers, detergent, shampoo is one of the cleanest examples of a geopolitical shock absorber in the market. When fear spikes and investors rotate out of risk assets, consumer staples companies like P&G see inflows. People don’t stop buying toothpaste during a war. They don’t defer diaper purchases because the Strait of Hormuz is tense. P&G’s earnings are genuinely disconnected from geopolitical events, which makes it function almost like a portfolio shock absorber it tends to hold value or appreciate slightly precisely when everything else is falling. The data on sector rotation during geopolitical events is consistent: consumer staples outperform the broad market in the 3-month window following a shock, nearly every time. P&G is the boring, beautiful embodiment of why quality compounders let you sleep at night.
Why This Matters for Your Portfolio Right Now
Here’s the honest takeaway from 80 years of data and a framework built around it.
The investors who build real wealth are not the ones who correctly called every geopolitical event. Nobody does that consistently. The wealth builders are the ones who stayed invested through the Type 1 shocks which is almost all of them while having a framework to identify the rare Type 2 that actually warrants action.
Right now, the market is pricing in significant geopolitical risk. That creates two opportunities most retail investors miss. First, quality compounders with no real geopolitical exposure think of businesses earning predictable, recurring revenue in stable markets are on sale relative to their intrinsic value because sentiment is dragging everything down together. Second, the genuine beneficiaries of a sustained defense spending cycle (which is structural, not just reactive) are re-rating upward in a way that still has room to run if the backlog-to-revenue math holds.
The investor who understands the difference between sentiment contagion and fundamentals contagion doesn’t just survive geopolitical shocks. They shop during them.
Want to Go Deeper?
This framework is the foundation. But applying it to specific businesses actually running the numbers on whether a geopolitical risk is already priced into a stock, whether a defense name’s valuation still makes sense after a 44% run, or whether a consumer staples compounder is genuinely undervalued right now that’s where the real work happens.
Every week at Waver Capital, paid subscribers get exactly that: full napkin math valuations, proprietary scorecards, and deep dives that go three levels below what you’ll find in any news article or brokerage research note. The kind of analysis that makes you the smartest person in the room when your friends ask what you’re doing with your money.
Last Friday, the full PriceSmart deep-dive drops a business operating in 12 countries across Latin America, directly exposed to the macro forces this article has been describing. The free section goes live for everyone. The part that actually tells you whether to own it at current prices is for paid subscribers.
If today’s framework was useful, the Friday deep-dive will be the application of it.