Another Day of Iran-Led Volatility: Why the Case for Staying Invested Remains Intact

The markets are volatile right now, and for good reason; the threat to the global economy from a prolonged closure of the Strait of Hormuz is significant. It's not just a question of crude oil and liquefied natural gas (LNG); significant quantities of refined petroleum products, fertilizers, and other commodities also flow through the Strait.

The conflict in Iran has an uncertain resolution, and that's feeding through into the markets, trying to price in the most likely outcome. Still, in all this uncertainty, the case for remaining fully invested remains.

Rational actors

It's impossible to tell when energy flows through the strait will return to normal. It's not just a question of whether Iran agrees to reopen the strait; there's also the question of the type of reopening and the conditions on which it will be reopened. There's clear daylight between the U.S. and Iran on that subject, but the uncertainty doesn't just end there.

Image source: Getty Images.

There are also issues around insurance companies' willingness to insure shipping companies and cargo owners, and it's not yet clear what the damage to energy infrastructure in the region will be when the dust settles or the risk perception energy customers will be left with after the conflict is over.

However, what we do know is that it's in almost everyone's rational interest to reopen the strait to energy flow in some form or other. Europe and particularly Asia need physical supply; the countries of the Arabian peninsula need to export energy, fertilizer, and refined products; the U.S., Europe, Asia, and most of the world need lower energy prices; myriad developing countries need fertilizer; and Iran ships energy through the strait, as well as plans to generate revenue from controlling traffic through the strait.

Stay invested, but adjust portfolios accordingly

All of this is not to argue that there isn't a real possibility of lasting consequences from the conflict, because there is. While the magnitude is unknown, it's clear that the ripple effects are likely to impact crude oil, LNG, refining crack spreads, fertilizer prices, shipping rates, and even industries such as mining that use sulfuric acid from the gulf for leaching.

As such, it makes sense to increase the allocation of a portfolio to stocks that benefit from a prolonged closure of the strait and/or the consequences discussed. A stock like Chevron (NYSE: CVX) would suit the purpose. In addition, if you are concerned about growing geopolitical tensions worldwide and the trend toward global central banks holding reserves in gold rather than U.S. Treasuries or other U.S. assets, then increasing an allocation to gold makes sense, too.

The cost of missing out

While it's highly tempting to try to time the market, the market has a way of disciplining even the most discerning investors. Simply put, and as recently seen, when the market goes up, it can do so in a violent manner that leaves underinvested investors behind.

According to Hartford Funds, 48% of the best days for the market between 1996 and 2025 occurred during a bear market, and 28% of them occurred in the first two months of a bull market. In other words, if you wait for a bull market, you will capture only 24% of the best "up" days.

Moreover, a $10,000 investment in 1996 would have grown to more than $192,000 by 2025, but if you had missed the 10 best days, that figure would be only about $85,500. Missing the best 20 days reduces it further to approximately $49,500.

Simply put, trying to time the market can be costly for investors.

Image source: Getty Images.

Staying invested

To be clear, staying invested doesn't mean blindly maintaining the same portfolio through thick and thin; it means trying to keep money in the market by adjusting to circumstances and mitigating risk. There's a heightened sense of risk in the market now, but there are also rational realities in place that, hopefully, will guide events, and investors can adjust their portfolios to control for risk.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.