Money Talks: Investing for War

By: Stacy Johnson
By: Stacy Johnson

The cost of war can be devastating in terms both human and financial. And that's why it's important to do everything possible to prepare for the worst, even when you're expecting the best.

So how does that translate to your personal savings? How do you safeguard your savings?

One idea could be to buy gold, because it often goes up when clouds gather. And in fact, gold mutual funds have gone up a ton over the last year. That, unfortunately, might be exactly why it's probably too late.

Gold went up prior to the last Gulf war, too, but prices plunged for years afterward. So unless you think this conflict is going to resemble 1941 more than 1991, I'd steer clear of all that glitters.

What about the stock market? Many people remember that during the last war with Iraq, the market fell leading up to the war, but went up like a rocket the instant it became clear that a quick victory was imminent.

So if history repeats itself, should we buy stocks now? Probably not. Quick victory was a happy surprise last time. This time, it's what people expect. So if victory is big, the ensuing rally may be small. And if victory isn't quick? The market could easily bomb.

Many people assume that that war is always good for the economy, since the economy goes into high gear to pound plowshares into swords. So is war a good time to invest in stocks?

Investing during World War II would have been a great idea. The entire economy expanded as the country geared up, and that helped make stocks victorious for years afterward. But stocks were a casualty of Vietnam. To finance the fighting, Uncle Sam borrowed big. That contributed to high interest rates, which are really bad for stocks. In fact, the market didn't recover till the early '80s.

What about the last gulf war? Too short to have much long-term impact.

So what about now? Should you be a buyer, a seller? What do you do to protect your savings?

Let's start with something every successful investor knows. It's a mistake to base long-term decisions over short-term events. And investing in stocks, especially in things like a 401(k), is long-term.

The fact is that nobody knows how long the war, if there is one, will last and how the outcome will affect the world or the markets. That makes it tough to make smart decisions.

That being said, here are some things to watch for. A long war could mean big budget deficits. That could lead to higher interest rates, which will cripple both stocks and bonds. So pay attention when you hear the words "budget deficit."

And if you're getting close to retirement or otherwise needing your savings? Might want to play it safe by reducing your holdings in stocks and long-term bonds.

But if you're a typical long-term investor, sit tight. Just as the political outcome of a Gulf war is uncertain, so is the financial outcome. And normally the best thing to do when there's uncertainty? Dig in and wait.

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