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Ask the Financial Expert: Does Terrorism Have a Long-Term Impact on Your Investments?

Ron Joelson •  November 20, 2015 | Your Finances, Ask the Expert

Each month, we book time with some of our company’s top financial brain power to answer questions about investing and your finances. This month we are talking about terrorism and its effect on the market and your investments.

Ron Joelson

Ron Joelson is Northwestern Mutual's chief investment officer and oversees the company's general account, valued at approximately $200 billion as of June 2015.

Mark McLennon

Mark McLennon is vice president of Investment Products and Services (IPS) Business Development. He oversees the fee-based financial planning program and departmental growth initiatives.

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The following is an excerpt from our Ask the Financial Expert podcast (listen to the entire podcast below): 

Mark: The recent terrorist attacks in Paris have affected many of us. Our thoughts are obviously with those people directly affected by this. But when these attacks happen, they have a financial effect as well; and we’d like to talk about that.

Ron: First let me echo your thoughts. From a personal perspective, I think everybody is affected by this kind of thing, and it’s very difficult for us to get used to the concept of it.

From an economic perspective, the markets seem to be used to this in some way. We’ve certainly noticed over the last few years in particular that the markets have been able to withstand things like this happening and plow through them. I think this is no exception.

In the case of the Paris attacks, the fact that it happened on a Friday and having the weekend to think about it was probably something that helped in this situation. But as we look back in history, the markets have generally recovered, whether it’s the Iran hostage crisis in the late '70s, the Beirut bombing in the early '80s, Pan Am 103, the attack on our embassy in Kenya, the attack of the U.S.S. Cole, or the bombings in Madrid. All of those things had some immediate market impacts. But after several months, you saw all of those events having almost no effect on the longer-term perspective. September 11, which was clearly on a much greater scale than anything here, did have a GDP impact for that year, but even there, I think, you could certainly say there was a bounce back.

Based on the way we think and the way our clients think about investments over a long time horizon, this shouldn’t have that much of an impact.

Mark: Why does the market tend to react to this kind of thing?

Ron: It’s uncertainty. Anytime there’s uncertainty that could impact people’s projections, company’s projections, there are direct industry impacts. For instance, in France think about tourism: People may worry that the attacks will have an effect. Often there is a short-term economic effect of spending being postponed. But then you tend to see it snap back in the next period. So there can be a worry that there won’t be a snap back, that you’ll have fewer shopping days as we get into the end of the year. Remember, consumer purchases drive a large portion of the economy. The consumer is fickle; and if consumers start to get scared for whatever reason and they're going to stay home, it could have an impact. So that can be a real effect.

Hear more from Ron and Mark in the “Ask the Financial Expert” podcast:

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The opinions expressed are those of individual investment professionals as of the date stated on this article and are subject to change. This material does not constitute investment advice, is not intended as an endorsement of any specific investment or security and is not a prediction of what will happen in the markets.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall.  This also holds true for bond mutual funds. When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates, and are not obligated to return the investor’s principal. Additionally, high yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

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