Diversify portfolio to offset market's wartime gyrations

By Linda Loyd
Knight Ridder News Service

What should individual investors do to "war-proof" their portfolios?

Tinkering with investment holdings just because it's wartime is risky, experts say. Still, they agree, it is always a good idea to make sure a portfolio is diversified to offset the market's gyrations.

"On the outbreak of war, don't panic," said Mark Sellers, editor of Morningstar Inc.'s StockInvestor newsletter. "Investors should not get caught in a herd mentality. If the market starts to drop, don't sell everything. That is the worst time to be selling stocks.

"The basic strategy of buying great companies and holding on to them is no different if we are at war than in peacetime."

David Kotok, chief investment officer of Cumberland Advisors Inc., of Vineland, N.J., noted that because war with Iraq had been a prospect for months, this has been "one of the most advertised wars you are ever going to have."

"If you were afraid of the war, you should have already panicked and gotten out of what you were worried about with your investments," Kotok said.

Experts caution against overloading on aerospace and defense stocks. Although defense was seen as a growth sector last spring, defense stocks peaked in May. They tumbled starting in July before rebounding a bit two weeks ago, as war seemed more imminent.

Prices for the major defense companies, in particular, came down sharply. That's because investors had begun buying defense stocks during the 2000 presidential election campaign on promises of increased military spending. The terrorist attacks in 2001 and subsequent emphasis on homeland security further propelled the stocks, which became expensive.

Starting in late spring and early summer, some investors decided to cash in profits.

"The time has passed" to invest in defense stocks, according to Kotok, who said: "The place to put your investments now are the areas which will benefit when the oil price falls after the war — consumer durables, nondurables, vacation housing, travel, entertainment and discretionary services."

Sam Stovall, chief investment strategist for Standard & Poor's Corp., agreed. "It's smarter for investors to think defensive than defense, and to focus on safe-haven industries, such as food, beverages, household products and gold, rather than focusing on armaments," he said.

"In 2002, you would have been better off buying beer than bullets. In 2002, the S&P Brewer's Index gained 7.4 percent on the year, while the aerospace and defense stocks fell 7.2 percent on the year."

According to Stovall, people "always have to eat and drink. And, if they overdo it, go to the doctor. So throw in healthcare, too — pharmaceutical and managed-care companies."

In boom times or bust, the best advice, experts say, is to make sure your financial assets are diversified, in a mix of stocks, bonds and other savings that are right for you, based on your age, financial situation, and job security.

But unlike 1990, when the Iraqi invasion came as a surprise, talk of war this time has been widespread for months and "short-term gains are already priced into the stocks," said Morningstar's Sellers.

Historically, the markets "go down in anticipation of war, but once we actually go to war the markets bounce back," Sellers said.

Oil prices spike higher at the outset of war, but "no one expects prices to stay high very long," Sellers said. "But if war is prolonged, that would probably benefit U.S. oil companies specifically.

"Commodities companies will benefit — natural gas, gold mining companies. Gold has really been booming over the last year and is seen as a big safe haven in times of geopolitical turbulence."

But Sellers cautioned that the average investor should not rush to buy gold. "You may do well the year you buy it, but people don't know when to sell. And if they hold on to it too long, gold underperforms bonds and stocks."

Rather than focus on short-term trends, most investment managers recommend buying the stocks of good companies at cheap prices and holding them.

In the days after military intervention, "sit tight, or perhaps buy stocks," said Kotok of Cumberland Advisors. "I'd buy a broad index of big-cap stocks like the S&P 500.

"The sectors you buy, if the oil price breaks, is retail — something that's been beleaguered lately — consumer durables and non-durables, vacation housing travel and entertainment."