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Disturbing Headlines, Strong Equity Markets: Why the Disconnect?

Finally, the growing populism - evident in the outcome of recent European elections - raises the risk of misguided policies that could add drag to an already sluggish recovery. To be sure, none of these potential long-term effects are likely to hurt markets in the near term, but ironically investors are becoming more acclimated to the risks at a time when their cumulative impact may be starting to impact global growth, risk premiums or both.

For investors wondering how to respond to the potential long-term impact of world news headlines, there is no single answer, but I would suggest three rules of thumb: diversify, have some small portion of your portfolio allocated to "cheap insurance" assets that should do well in a crisis, and emphasize value.

On the latter, it's not that cheaper assets will be immune when and if this year's headlines lead to next year's crisis. Rather, it's probably easier to avoid a meltdown in your portfolio if you own assets that reflect the world's imperfections.

Sources: BlackRock, Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

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