For the investor, political risk is not primarily about events.
It is not, for example, about coups d’état, riots in the street, even wars. Risks associated with events tend to spike up and down quickly.
Political risk for the investor is primarily about conditions. A doctor asks: what is the patient’s condition? The investor asks the same question, except that the patient in question is usually the nation: what is the nation’s condition?
When the stock market is way up as the S&P 500 has been—up +167% in just under 5 years (or +23.1% per year)—it is hard to imagine any other way to make money than just "being in the market." Conventional hindsight agrees: just sit tight during bear markets like that of 2007-09, it says, and things will work out. It may take once-in-a-century intervention by the Fed. But the authorities will never leave you stranded.
Yet markets go down.
Let me begin with the punch line – a paradox:
In investment management, it is possible to own many securities and be selective; possible to add securities and add value; and possible to get diversification for free.
How do we know?
We do it.