Preparing a War Portfolio
What’s a War Portfolio? As the name implies, a War Portfolio is one that prepares you in case of war. Or an extremely defensive portfolio. What normally happens to people if they expect a war to happen? People start to horde up things including food, water, fuel or almost anything. When people start to horde things, panic happen. Fear begins to control our decision making. Our instinct for self preservation kicks in.
A similar scenario happens financially in a War Portfolio. If you create a War Portfolio, you are assuming the worst will happen in the economy. Now there are times it is smart to go a little defensive in the case where the stock market has risen too high, too fast. But a “war is going to happen soon” mentality is on the extreme.
The last recommendation of a defensive portfolio happened not too long back. Towards the end of 1999, when alarmists warned of the impending Y2K disaster and some panicked investors converted all their investments to cash, often with significant tax consequences and missed market returns. With terrorism in recent years, the question is, “Should you be bullet proofing your portfolio for wartime?”
If you have not seen this before, then I recommend that you get yourself a chart of Dow Jones index or S&P 500, for the past 50 years. You’ll notice how the market weathered the storms of war in the past. Take a look at World War II, the Iraq war, Sept 11, you’ll notice that just before the event took place, markets tumbled quite significantly. The drops are quite sharp, and if you look closely, you’ll also notice the markets rebounded fairly quickly. The charts below tell illustrates this well.
Y2k
Iraq War
Sept 11, 2001
This means that in most cases the economy and the stock market have weathered war well. So instead to creating a war chest, the smarter move would be a portfolio that’s well diversified and that reflects your long-range financial goals, risk tolerance and personal circumstances. And fear should not drive your investment decisions.
Besides that, a disaster-driven portfolio is usually extremely conservative. This mean you’ll more likely to fail to reach your financial goals because of inferior long-term returns. Anyway, if a national catastrophe were to strike that truly crippled the nation—devastating terrorist attacks or a nuclear attack, for example—even a “war†portfolio would unlikely be of much value in the aftermath.
You can check our the charts at Yahoo finance here.
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