Middle East war: carnage for the world and your money?

As Israel’s strikes on Iran threaten to spark a wider war, lessons from the global financial crisis – when freaked-out Aussie stocks plunged 54 per cent – are worth revisiting.

Iran has retaliated to Israel’s bombings by launching drones. Picture: AFP Photo/UGC/Iran TV

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Hold onto your hats, your nerves, your investments and your superannuation. Things are likely to get really rough.

While it’s easy to dismiss Israel’s pre-emptive strikes on Iran and its nuclear weapon capacity as just another Middle East flare-up, it could be the straw that breaks financial markets that appear to have put common sense on the backburner in recent months.

The quick march of markets to this week’s record high from the early-April lows – Aussie shares are up 16 per cent and US shares have climbed 21 per cent – has seemed crazy to many observers, given the litany of geopolitical and economic issues confronting the world.

That April plunge was caused by Donald Trump’s “Liberation Day” tariff announcements, and the uncertainty around trade wars remains live as an unpredictable US President continues to rattle the world.

Add to that the real wars and the ongoing suffering in Gaza and Ukraine, rising US-China tensions, and as of today surging oil prices and the threat of wider war in the Middle East, and it appears markets may have been too optimistic.

The aftermath of an Israeli strike on Tehran, the capital of Iran. Picture: Vahid Salemi/AP

US futures trading suggests a 1.5 per cent fall by Wall Street on Friday night, and Australia’s S&P/ASX 200 is down just 0.4 per cent in end-of-week trading, perhaps not negative enough.

What if China sees the US military being spread too thinly globally amid more Middle East conflict and decides now is the time to invade Taiwan?

What if the Middle East deteriorates rapidly and oil prices really spike – more than their 9.3 per cent Friday surge – and this fires up inflation again as countries grapple with weak economic growth? Global recession?

What if Vladimir Putin gets even nastier with Ukraine or the war there spreads further in Europe?

There are so many what-ifs right now globally, it would be dangerous to believe anyone telling you to dive into shares today or to buy the dip.

It’s crazy that sharemarkets have been at record highs while the world’s best-known hedge against instability and uncertainty, the gold price, is itself at record highs above $US3400 ($5200) an ounce.

The gold price has trebled in the past decade, telling us the world is freaking out much more than we would like to think, yet sharemarkets are still surging.

The higher they go, the harder they are likely to fall when the next big shock arrives.

April’s Liberation Day plunge, and the Covid collapse in 2020, are the most recent examples of global events smashing markets’ confidence, but those falls were small in comparison with the carnage we saw during the Global Financial Crisis in 2008 and 2009.

The Covid-related plunge in March 2020 topped 30 per cent, but when the GFC struck 17 years ago the ASX 200 fell 54 per cent between November 2007 and March 2009. Now that’s panic-selling.

Lessons learned from the GFC are worth repeating now when it comes to people’s shares and super.

Lesson number one: stick to your long-term wealth plan, because markets can fall much further than you think, and recover faster than you think. After bottoming out in the GFC in March 2009, Aussie shares climbed 55 per cent by October 2009, although the S&P/ASX 200 Index took more than a decade to regain all its GFC losses.

Lesson two: don’t panic. People have a tendency to sell out at the bottom, when despair is at its strongest, and don’t have the nerve to jump back in until the recovery is well under way. Many older Aussies suffered a huge GFC hit to their super, locked in their losses by switching all their super to cash in a panic, then missed the rebound.

Lesson three: trying to time financial markets is dangerous, and closer to gambling than investing. If you want to take some profits now, given record highs, go for it, but have a plan to buy back in or risk endlessly losing money on cash investments after the impacts of tax and inflation.

I grew up during the Cold War and its constant threat of nuclear holocaust, but the world seems scarier today than it did back then.

It’s OK to be scared, but don’t let that fear derail your financial security in the long term.

Originally published as Middle East war: carnage for the world and your money?