Take time to 'war-proof' your holdings

"Weatherproofing" a portfolio is a time-honored tradition – ensuring you are well positioned to offset adverse market disturbances, such as recession.

Now, some longtime market watchers say it makes sense to "war-proof" your portfolio as well.

"A lot of people now feel that they should do something to protect their financial assets in case of war with Iraq," says David Caruso, an investment manager in Manchester-by-the-Sea, Mass., with more than $200 million under management.

Protecting your assets against military conflict is not the same as seeking to profit from conflict, Mr. Caruso says.

"It is certainly right to protect what you've got," says Caruso, who has just co-authored "Decoding Wall Street," a new book on personal finance.

Military conflict invariably has an impact on financial markets, says Alan Ackerman, chief market strategist at financial firm Fahnestock & Co., in New York.

In the case of the Gulf War, for example, the market tumbled when Iraqi forces invaded Kuwait at the beginning of August 1990, he says.

Share prices dropped about 13 percent that month, but the market rallied when US and United Nations troops rolled back the invading forces.

There are many differences between now and then. In 1990, the Iraqi invasion came as a surprise. This time, war talk has been widespread for months – and so is "built into" the market.

Mr. Ackerman believes investors should hold some positions in defense stocks, energy, and gold. Companies he likes include Northrop Grumman and Ocean Energy, an offshore-drilling firm.

"At the least, I'd have about 25 percent of my portfolio positioned to offset any war with Iraq," says Caruso. "US Treasury bonds remain the world's safest investment," he says, backed by the full faith and credit of the US government. He also likes gold, defense firms, energy (including oil), and commodities. "The problem is that these sectors have already had a major run-up in value in recent months. But there may still be room for growth, especially if we go into conflict," he says.

Having holdings in oil and energy is especially important, says James Stack, editor of InvesTech, a newsletter published in Whitefish, Mont. There are widespread concerns that oil prices could ratchet up if war occurs, he notes.

Caruso believes it is important to know how your own personal portfolio – as currently allocated – would fare during military conflict. The website www.RiskGrades.com allows users to test the stress of war on stocks and mutual funds. The service is free.

RiskMetrics, the New York financial-information firm that runs the RiskGrades site, has concluded that the S&P 500 could initially lose up to 10 percent of its value in event of conflict.

Still, says Fahnestock's Ackerman, markets traditionally rally after the initial stages of conflict.

What if you have deep reservations about investing in military or war-related companies? One alternative: socially responsible mutual funds that screen out defense stocks yet have done well over time, such as the Pax World Fund (888-729-3863).

Another approach, say fund experts: Buy total-market stock-index funds, in which defense funds constitute only a small fraction of the total portfolio.

Finally, bonds are expected to lose only a small part of their value during a war, as happened during the Gulf War, according to analysis by RiskMetrics.