A new era of geopolitical turbulence, combined with shrinking diversification in global indices, is likely to push advisers towards more active management of client portfolios

The beginning of January 2026 has changed the world forever, with huge geopolitical forces at play.

Washington’s move into Venezuela is likely motivated by more than meets the eye. China’s significant investments in the country — historically 40 per cent of its total Latin American investment — and its control of Venezuelan rare earth metals pose just as much of a threat as its involvement with the country’s oil reserves. It is also well known that Iran has been producing drones in the country, and it has been reported that a prominent Russian general is stationed there.

For investors, however, US actions in Venezuela are reflective of a broader shift in the country’s ideals. The US is no longer above blatant assertions of dominance or taking what it wants without strong legal or moral pretences.

Geopolitical volatility could now become a key factor driving equity movements in coming years, opening up a plethora of new uncertainties for investors to face

This is hugely significant, and not just because it constitutes a throwback to 19th century mercantilism. More broadly, when the US acts this way, it enables and validates other superpowers to do the same, opening the floodgates of geopolitical risk.

This adds layers of nuance to investing that require strict respect for market action. Simplistic adherence to cause-and-effect thinking will fall short, and instead, advisers will need to track the sensitivity of risk assets to a myriad of capital flows.

This means geopolitical volatility could now become a key factor driving equity movements in coming years, opening up a plethora of new uncertainties for investors to face. To be successful in this landscape, investors must drastically shift their strategies.

New investing landscape

Global governments’ impact on markets has always existed and was particularly heightened after the global financial crisis in 2008. But it has been largely limited to changes in monetary policy, with occasional bursts when fiscal policy drives capital flows and new tariff policies.

However, geopolitical risk is now positioning itself front and centre, bringing the potential impacts on financial markets up to a new level. Geopolitical influences typically lead markets to lurch, discounting certain viewpoints before reversing to discount others. Markets react abruptly and emotionally to price in the effects of geopolitical news. Wars, elections and sanctions can all cause huge upward or downward movements, making markets more challenging for investors to navigate.

This adds a new set of rules for investors and advisers to follow. They must now factor in new global events and details into investing strategies, requiring them to cast a broad net as drivers and capital flows shift rapidly.

Risk assessments have always been paramount but given that geopolitical concerns will now be a chief driver of capital flows, a multi-factor approach has become imperative. Mark Twain’s warning is now more relevant than ever: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” This must now become investors’ golden rule.

Game changers

Geopolitical rigmarole is not new. What has changed is the level of diversification within major world indices.

Previously, investors have been assured by the fact that their portfolios are sufficiently diversified to withstand downturns in any major sector, no matter what happens on the global stage.

However, investors can no longer rely on this. The rise of AI and the Magnificent 7 tech companies is causing overweight allocations within indices to these areas of the market. The Mag 7 now represents more than 34 per cent of the S&P 500, up from just 12.5 per cent in 2016.

This leaves index investors exposed to steep downsides, should any macroeconomic or geopolitical forces impact these few tech companies. Smart investors and advisers will foresee the potential for decreasing returns if they follow the traditional passive investing approach and embrace a strategy allowing them to chase real market opportunities.

Shifting exposure

Lack of diversification combined with heightened geopolitically led market volatility means investors and advisers can no longer expect strong returns from simply allocating to indices and waiting for money to grow. As geopolitics moves markets in unexpected ways, investors must be able to flexibly shift portfolio exposures as circumstances change. Advisers must now brace clients for a period where passive investing leaves too many opportunities unexploited.

Advisers must now brace clients for a period where passive investing leaves too many opportunities unexploited

Active management has a track record of outperforming passive investing during market corrections, often triggered by geopolitical turbulence. Recent research shows that of the last 28 market corrections, 22 saw active portfolio management outperform passive, with an average outperformance rate of 1.02 per cent. Although this may seem small, it could be the difference between stagnating returns and beating the market over time, especially given the large sums overseen by wealth managers.

The current top-heavy index environment requires investors to diversify not only their investment strategy but also their risk management approach. Active indexing can give advisers an edge over their competition, helping retain current clients and attract new investors. Managers clinging to passive strategies that served them well during less volatile times will lose out as geopolitics shakes the market in unforeseeable ways.

Peter Corey, co-founder and chief market strategist, Pave Finance