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TORONTO (GlobeinvestorGOLD)—"War! What is it good for? Absolutely nothing!" So sang Edwin Starr in 1970, and it's true today for the long-term investor. Before you start loading up on duct tape and bottled water, step back, look at the big picture, and realize that this, too, shall pass.
We all have a penchant for melodrama, and with news media playing Gulf War II as the "event of the century," maybe we're getting a little caught up in it. If you look at the long-term market impact of other "events of the century" over the past 35 years, however, you'll find the smart investor played it cool - and the smarter investor found opportunity.
"If you're in it for the long term, investing in war should be the same as investing in peace," says Patricia Lovett-Reid, vice president of TD Wealth Management. When it comes to personal finance, a good strategy is a good strategy. Once you've got it in place, contribute when you have the money or when it's tax efficient. "Investing for war is really an attempt to time the markets, and the long-term investor should never try to time the markets."
To prove the futility of trying to trade your way through a political crisis, take a look at a graph of the S&P 500's performance from 1970 to the present. The S&P 500 is arguably the best reflection of the overall equity market, and 33 years is a good time frame for the long-term investor. Focus on key political events along the graph including President Richard Nixon's Watergate scandal (1972), the Iran hostage crisis (1980), the 1987 market crash, and the first Gulf War (1991). It's pretty hard to find much more than a blip on the graph line. Contrast those with the long term trend, and you find valuations on the S&P 500 quadrupled between 1970 and today, despite that big hump near the end we now know as the end of the tech bubble.
For long-term investors with a significant portion of their assets in fixed income, the line becomes event flatter. Fixed income yields change with interest rates and interest rates rise and fall over longer periods compared with equities. A 50-per-cent portfolio weighting in fixed income translates roughly into a 50-per-cent drop in volatility.
If the long-term investor argument doesn't convince you to stay the course, perhaps there's more than the impending Gulf war that has you concerned. If you feel it's time to ratchet down your risk level, Patricia Lovett-Reid says don't do anything drastic. She cautions against jumping on the gold and oil bandwagon, for example. War fear has crude oil nearing $40 a barrel and gold over $350 an ounce.
The long-term investor will remember when gold hit $850 in the early 1980s and crude went below $20 in the late 1990s. Where they'll end up no one knows. Instead, she suggests increasing your weighting in capital preservation securities like bonds and income instruments, or moving into the stocks that make fundamental sense. "Coke and diapers will be around forever", she says. The trend of aging baby boomers will continue; which puts health-care stocks under consideration.
If you are convinced by the long-term investor argument, consider profiting from panic. There are always good investments in any political or economic climate, and many of them have taken an undeserved beating in the broader market slide. There's one word of caution for value investors from Patricia Lovett-Reid, though: consider your tolerance for risk and how much time you have to wait until those stocks realize their true value.
Finally, consider your personal situation separate from the outside world. Is your income secure? Will it grow? Is your debt load decreasing? Are your expenses increasing? Chances are these factors have more of an impact on your finances than Saddam Hussein.
Any political crisis brings with it the remote chance that it could spill over into something bigger—"Vietnam Syndrome" has become the term. But the chance is too remote to alter your financial plan right now. There's always time to make adjustments in the future. For now, this is one of those rare times when the best course of action is doing nothing.
Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.