Investing during turbulent times: what type of investment strategy should you adopt while the country is rebuilding Iraq? (One For Your Money).

Now that the United States and Iraq have finished their war, what's an investor to do? Some investors jumped back into the market big when President George W. Bush launched Operation Iraqi Freedom on March 19. The market surged the next few days after the allied offensive began in anticipation of a quick conclusion to the war: The Dow Jones industrial average index recorded its best week in nearly 20 years according to Ibbotson Associates, jumping 4.67%; while the Nasdaq composite index rose 2.12% and the Standard & Poor's 500 rose 3.82%. But the markets soured the following week, recording five straight days of losses after U.S. prisoners of war were paraded around on television, Iraqi fighters began inflicting allied casualties, and fears that the war would be longer and more costly than initially thought began to spook investors.

Many analysts now believe that the market is being driven by news and uncertainty: If the news continues to be bad, it will make people uncertain about the future, and a market recovery will continue to stall.

"If there were not a pattern of going back and forth between good news and bad news, [then] maybe [investors] should buy," says Lipper Senior Research Analyst Don Cassidy. "But what about the threat of [terrorist] retaliation now that the war has ended? What about the nature of what happens during the rebuilding of Iraq, like the possibility of an unstable government?"

Questions such as these make investors skittish. And if that doesn't create enough uncertainty, John Nofsinger, financial analyst and author of the book Infectious Greed: Restoring Confidence in America's Companies (Financial Times Prentice Hall; $24.95) says, "One thing affecting the stock market is the general social mood. We don't feel very good these days ... there are more jobs being lost and not many are being created, companies are not selling as many products, and our economy is not as good." He reasons that this pessimistic mood is gradually slowing consumer spending, which has the potential to depress the economy and stock market further.

To counteract the effects of a market that moves on emotion, Charles Payne, CEO of Wall Street Strategies in New York City, says investors should accumulate cash until the market adopts a more favorable mood. He says investors should also understand that the bull market of the late 1990s, with its seemingly unlimited upside, is gone. "If you buy stocks now, I would suggest that you consider taking profits within 90 to 180 days, because this is what's known as a range-bound market--and that means that it's not going to take off for a long, long time," says Payne. "It could be a year or longer," he asserts.

Unlike Payne, Tracy V. Maitland, CEO of Advent Capital Management in, New York City, advocates taking a longer-term approach to investing in a wartime economy. He recommends investing in stocks that you've thoroughly researched and feel confident will grow over the long haul.

"Trying to make a bet on a short-term war one way or another isn't the right way to approach this market," says Maitland. "You have to have a long-term objective to win ... I would encourage people to continue dollar-cost-averaging in this marketplace because this is the third down year in the stock market, and stock values are more reasonable now than they've been in three years."

Perhaps the most prudent advice comes from Nofsinger, who says investors should concentrate on capital preservation in this market. "Invest not to lose" he warns, even encouraging investors to look outside the stock market. "Try short-term bonds, Treasury bonds, and bank accounts. Right now, the risk of losing money outweighs the potential gains." No one ever said war or rebuilding efforts were easy.

Effects of War on the Stock Market

                     WWII          Korean War
                (December 1941)  (June 1950)

Month of             -4.1             -5.5
3 months after       -6.5             11.9
6 months after       -1.0             20.8
7 year after         20.3             28.0

                                     Persian
                  Vietnam War       Gulf War
                (August 1964)    (January 1991)

Month of             -1.2              4.4
3 months after        4.0             10.0
6 months after        8.6             14.6
7 year after          9.8             22.7

Note: Table made from bar graph.

Matthew S. Scott

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