The financial news is dominated by inflation, monetary policy, and interest rates. But it’s my contention that investors are underestimating geopolitical risk. A “black swan” could be waiting to take flight in Eastern Europe. Let’s assess the overseas risks and how you can hedge your portfolio against them.

In the Russia-Ukraine war, we’re seeing echoes of the Cuban Missile Crisis. It was in the month of October, 60 years ago, that the world almost ended.

The Cuban Missile Crisis of 1962 was a fraught confrontation between the United States and Soviet Union, occurring October 16-28, that was triggered by the Kennedy administration’s discovery of nuclear-armed Russian ballistic missiles in communist Cuba.

The 13-day brinkmanship between President John F. Kennedy and Soviet Premier Nikita Khrushchev was the closest the world came to nuclear Armageddon. Through the Kennedy team’s adroit diplomacy, Khrushchev eventually backed down and removed the missiles.

I was four years old at the time. There’s a black-and-white family photo of my mother and father, watching JFK on television, as he addressed the nation during the nadir of the crisis. My parents look terrified.

Welcome to Cold War II…

Fast forward to October 2022. The Russia-Ukraine war has escalated into a dangerous phase whereby Russian President Vladimir Putin is threatening the world with his country’s massive nuclear stockpile.

Putin is losing the war in Ukraine and he bitterly resents the West’s military assistance to the country that he invaded.

The Russian dictator last week gave an angry speech that reaffirmed his resolve to absorb Ukraine. Putin boxed himself into a corner, by declaring large swaths of Ukraine as belonging to Russia “forever.” In his virulent anti-Western tirade, Putin threatened to use “all available means,” including nuclear weapons, to achieve his aims in Ukraine.

Is Putin bluffing? Perhaps. But let’s put it this way: the risk of nuclear war is the highest it has been since October 1962.

Putin is desperate and the Kremlin’s war hawks are pressuring him to up the ante. Putin sees himself as a modern-day czar, as a man of destiny. His ego can’t afford to be humiliated on the world stage. His use of tactical, low-yield nukes on the battlefield, which is a distinct possibility, could escalate into full-blown nuclear war with the U.S.

Consider this: Reports surfaced October 4 that a special train operated by a Russian military division that wields nuclear arms was moving through central Russia and heading toward Ukraine. Are you nervous yet?

The financial markets already are jittery due to a variety of economic and political woes. Last week, all it took to tank the global markets was the British government’s introduction of a poorly conceived fiscal plan. Imagine how the markets would react if Putin caused some sort of nuclear incident in Europe.

A recent poll showed that most Americans already view Putin as mentally unstable. But the danger doesn’t just reside with Putin. A blunder or miscalculation by a military commander or political leader on either side of the conflict could quickly get out of hand.

Crisis investing…

You need to hedge your portfolio against these geopolitical risks. Here’s a checklist of steps to take now:

Under current conditions, a generally appropriate portfolio allocation is 40% stocks, 25% hedges, 25% cash, and 10% bonds.

In your stocks sleeve, I suggest exposure to aerospace/defense, either through individual stocks or a benchmark fund. Aerospace/defense is a recession-resistant sector that actually benefits from headline risk, and it has outperformed the S&P 500 year to date. Defense industry equities as a whole have been spiking in value since Putin started rattling his nuclear saber; they likely have much further to run.

If someone tries to tell you that our military is “neglected” or “hollowed out,” don’t believe them. In 2021, the U.S. led the ranking of countries with the highest military spending, with USD 801 billion dedicated to the military, representing 38% of total military spending worldwide that year, which amounted to USD 2.1 trillion.

As Russia and China align against the West, and NATO countries feel threatened by Putin’s revanchism, U.S. defense spending will only go in one direction, and that’s up (see chart).

Those trillions of dollars end up in the coffers of major global military contractors; the dominant and most investment worthy firms are based in the U.S.

In your hedges sleeve, make sure you hold precious metals, notably gold. The rule of thumb is that gold should make up 5%–10% of total portfolio assets. The yellow metal is poised for a bull run. Amid the backdrop of war and inflation, investors will increasingly turn to gold.

That said, don’t forget about silver. The “white metal” is a crisis hedge that often and unfairly takes a back seat to gold. If you’re concerned about stock market volatility and overseas risk, gold and silver warrant your attention.

Read This Story: Crude Revenge: Saudi Arabia, Russia Set to Cut Oil Output

I also like energy stocks right now. OPEC+ met on Wednesday to implement major production cuts in crude oil. Russia has been aggressively lobbying for lower output; Putin needs oil revenue to counteract Western sanctions, and to keep his war machine running.

Crude oil prices are back on an upward trajectory; get ahead of the curve and scoop up energy stocks that still trade at reasonable valuations. Energy stocks also make good inflation hedges.

Don’t delay in taking my recommended protective measures. If news breaks of a military catastrophe overseas, it’ll be too late.

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John Persinos is the editorial director of Investing Daily.

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