What Happens to the Market During War—And Why the Real Risk Isn’t the Event

Beginning in March of 2020, something strange happened.

Americans started hoarding toilet paper.

It wasn’t because supply chains had collapsed. It wasn’t because COVID created some sudden spike in demand. It was something else entirely, a feedback loop. Someone saw other people buying in bulk, so they bought some for themselves. That made the shelves look emptier. More people saw the empty shelves and joined the rush. Before long, the behavior itself became the driver of the shortage.

The exact same thing happens in financial markets. The 2020 market decline was, in many ways, a feedback loop of fear. The recovery that followed was a feedback loop of optimism. Market movements are not driven purely by fundamentals. They are driven by human behavior—by how people react to uncertainty, to headlines, and to each other.

This is why making investment decisions based on short-term events, especially during times of geopolitical conflict, is so dangerous. What feels like a rational response in the moment often leads to the exact opposite of a good long-term outcome.

Short-Term Reactions Are Normal—But They Rarely Last

When conflict breaks out—whether it’s war, rising global tension, or economic uncertainty—the market reacts quickly. That reaction can feel significant in real time, especially when paired with constant media coverage and negative sentiment.

When you step back and look at the data, the pattern is surprisingly consistent. Across decades of geopolitical events, the average market decline has been around -5%, with markets typically bottoming in just a few weeks and recovering not long after. These aren’t drawn-out, multi-year collapses. They are short-term adjustments to uncertainty.

That lines up with something else that often surprises investors. The J.P. Morgan intra-year decline chart shows that, on average, markets experience a drop of about 14% during the year, even in years that end up finishing positive . In fact, the market has finished positive in the majority of years despite those intra-year pullbacks.

That means declines aren’t unusual. They’re part of the process.

Markets Have Always Moved Through Conflict

If you zoom out even further, the picture becomes even clearer. The market has moved through:

• World wars
• Regional conflicts
• Terrorist events
• Political instability

And yet, over time, it has continued to grow. This isn’t because these events don’t matter. It’s because markets adjust quickly, reprice risk, and move forward. Businesses continue operating, economies adapt, and capital flows to where it is most productive.

Even during actual war periods, market returns have remained solid. Historical data shows that equities have delivered positive returns across many wartime environments, reinforcing the idea that uncertainty doesn’t stop long-term growth—it just interrupts it temporarily . 

The Bigger Risk Isn’t the Market—It’s Behavior

Where investors get into trouble isn’t the event itself. It’s how they respond to it. When markets drop, the instinct is to “do something.” Sitting still can feel irresponsible. Moving to cash feels like taking control. But this is where the feedback loop shows up again. 

Selling after a decline doesn’t just protect you from further losses, it locks in the loss in and removes you from the recovery. And the recovery doesn’t wait. The data in your “Impact of Being Out of the Market” chart makes this incredibly clear. A $10,000 investment left fully invested grew to over $80,000, while missing just the 10 best days cut that nearly in half . Missing more of those key days reduces returns even further.

What’s even more important is when those best days occur. Those best days don’t happen when things feel calm, they happen when things still feel uncertain. They tend to happen right around the worst days. In fact, several of the best days in the market occur within days—or even immediately after—the worst ones .

That means the decision to step out during uncertainty often guarantees missing the rebound.

Volatility Isn’t Just Something to Endure—It’s Something to Use

This is the part that is easy to forget when you’re in the middle of it. When markets decline, it doesn’t just create risk. It creates opportunity.

Lower prices mean:

• Higher expected future returns
• More shares purchased for the same dollar
• Greater long-term compounding potential

For investors still adding to their portfolios, downturns can actually improve outcomes over time. This is the foundation of disciplined investing, continuing to allocate capital even when it feels uncomfortable. The challenge is that emotionally, it feels backwards. This is where most people unintentionally hurt themselves.

When markets are rising, people feel confident investing. When markets are falling, they hesitate. But from a long-term perspective, those instincts are often opposite to what we should be doing.

Retirement Changes the Equation

All of this becomes even more important as you approach retirement. During your working years, market declines can actually work in your favor because you’re buying at lower prices. But once you begin withdrawing from your portfolio, the order of returns starts to matter.

This is what’s known as sequence of returns risk. If negative returns happen early in retirement while withdrawals are taking place, it can permanently reduce the longevity of a portfolio. Two investors can earn the exact same average return and still end up in very different positions depending on when those returns occur.

That’s why the conversation shifts at retirement. It’s no longer just about growth. It’s about sustainability.

Why Fixed Income Matters More Than Most People Think

This is where portfolio structure becomes critical. A retirement portfolio shouldn’t be built the same way as an accumulation portfolio. It needs to account for withdrawals, volatility, and the need for stability during uncertain periods. 

Fixed income plays a key role here. Not because it outperforms stocks over time, but because it behaves differently. It provides a more stable portion of the portfolio that can be used during periods of market stress. I often describe it as ballast on a ship. It doesn’t make the ship go faster, but it keeps it steady when the water gets rough. During a market decline—whether it’s driven by war, economic uncertainty, or something else—a balanced portfolio allows you to draw from more stable assets instead of selling equities at a loss. That creates time. And time is what allows equities to recover.

Balance Isn’t About Giving Up Return—It’s About Staying Invested

One of the biggest misconceptions is the idea that adding fixed income is simply sacrificing return, but for someone in or near retirement, that’s not the right way to look at it. The real objective is not maximizing return in a vacuum. It’s building a portfolio that you can stay invested in through a full market cycle. The biggest threat to long-term success isn’t earning slightly less, It’s making a decision during a stressful moment that permanently derails the plan.

A balanced portfolio isn’t about being conservative. It’s about being durable.

What This Means During Times of Conflict

When markets react to geopolitical events, it’s easy to feel like something fundamentally different is happening. History suggests otherwise. These events create short-term uncertainty. They lead to temporary declines. They generate headlines that amplify fear. But they have not historically changed the long-term trajectory of markets. 

What does change outcomes is behavior. For investors still accumulating, continuing to invest during downturns can enhance long-term results. For those in retirement, having a properly structured portfolio allows withdrawals to be managed without disrupting long-term growth assets.

In both cases, the goal is the same. Stay disciplined.

Final Thought

The toilet paper shortage in 2020 wasn’t caused by a real lack of supply. It was caused by people reacting to what they thought might happen next. Markets work the same way. Short-term movements are often driven by perception, fear, and reaction. But long-term outcomes are driven by discipline, structure, and time. 

The question isn’t whether markets will react to conflict. The question is whether you’ll react with them, or stay grounded in a strategy designed to get you through it. Over time, it’s not the events that determine success. It’s how you respond to them.

Sources & Supporting Data

• LPL Research, S&P Dow Jones Indices, CFRA — Geopolitical drawdowns
• J.P. Morgan Asset Management — Annual returns vs intra-year declines
• J.P. Morgan Asset Management — Impact of missing best days
• CFA Institute / Capital Market Data — Performance during war periods