It is understandable that investors are nervous. Not only are valuations stretched in many markets but there seems to be a significant threat of military conflict in the Korean peninsula.

Certainly the stand-off between Donald Trump and North Korea’s Kim Jong-un is worrying. If it ever turned into a hot war, the human consequences could be devastating, never mind what might happen to the markets. Nor is Korea alone as a potential military flashpoint.

But the main threat to the investment world is more prosaic. A decade or so of quantitative easing (QE) has inflated asset values. It is hard to believe that the substantial increases in many markets over that period can be justified mainly by improved fundamentals.

In relation to the first risk, it is important to put it into its proper historical context. Although such a conflict cannot be ruled out, it should not be forgotten that the threat of conflagration is hardly new. It is all too easy to forget that in the decades following the Second World War there was a constant fear of nuclear war between the Soviet Union and the West. Of course, it is clear in retrospect that it did not happen but that does not mean it could not have.

In relation to the market risks, there are reasons to be sceptical of reassurance by financial institutions. Central banks claims that they can manage an orderly withdrawal from QE are open to question. Extraordinary monetary policy was introduced as a temporary measure a decade ago yet any wind-back is just beginning. Despite all the talk of tapering, the Federal Reserve’s balance sheet is still roughly where it was in 2015. Meanwhile, the European Central Bank is maintaining a massive asset-purchase scheme.

daniel ben ami

QE may have staved off financial collapse in the short term but it failed to address underlying economic weaknesses. Meanwhile, the huge injection of credit has helped create the conditions for a new financial bubble.

Under such circumstances, it is advisable for investors to maintain strong nerves. The easy market gains have probably been made but it does not follow that there are no remaining niches to investigate. The first challenge is to locate the areas of appeal and the second is to harness them to the particular needs of each individual portfolio.

Survivalism is not the solution. Only the foolhardy or those who genuinely believe a global apocalypse is imminent will head into the wilderness with bars of gold, a case of tuna and a rifle.

For most investors the challenge will be to hold their nerve in difficult times. Complacency and the temptation to panic should both be resisted.

Daniel Ben-Ami, Deputy Editor