My older brother, Elgin, was born when Nazi U-boats were penetrating the St. Lawrence where they sunk 23 vessels, mostly Canadian, and killed hundreds. War was real. “We made plans,” my mother once told me, “to meet down by the river, in case the family was separated.” And that was in the middle of Ontario. Food was rationed, so coupons for sugar or butter became an alternative currency. Stocks hit bottom a few months after Pearl Harbour.
War’s unlikely now, although you sure wouldn’t know it watching CNN. The kid dictator with a bad haircut in North Korea tried to light up a big missile on the weekend, but it wisely exploded. A US warship armada sails ever closer, and China warns of ‘storm clouds’ and a conflict in which ‘everyone will lose.’ Meanwhile the American president is famously unpredictable, and has hit Twitter finger on the button. The Chicken Littles are telling you to store tuna and ammo and I’m getting asked more, ‘where‘s money safe in a war?’
Hmm. Widespread conflict is remote. Surgical attacks on military installations are less remote. Belligerent threats and warnings of merciless, Biblical retaliation are absolutely expected. And, yes, we’re talking about a showdown between a 70-year-old bellicose billionaire real estate developer and the 33-year-old dictator of an impoverished brainwashed country who likes basketball and murdering relatives. Anything can happen.
This means uncertainty, volatility and risk. The best defence is a balanced portfolio with safe stuff (40%) and things linked to growth (60%) with a broad diversification among asset types, and globally invested. The very reason you want a few bonds, after all, is because they normally go up when stocks go down. Meanwhile preferreds pump out a great dividend and the REITs are not correlated to equities. If hostilities were to erupt, you can therefore ignore your portfolio and worry about Wolf Blitzer’s beard.
But what about the doomers and gloomers who are now trying to talk you into gold coins and buried school buses? What has history taught us about investments in times of conflict?
According to oracle Warren Buffett, in a war cash is trash and you should own equties. “I will still be buying stock. You’re going to invest your money in something over time. The one thing you can be sure of is if we went into some very major war, the value of money would go down. … That’s happened in virtually every war that I’m aware of. … The last thing you want to do is hold money during a war. You might want to own a farm, you might want to own an apartment house, you might want to own securities. During World War II the stock market advanced. The stock market is going to advance over time.”
Barton Biggs is also a legendary investor, whose book “Wealth, War & Wisdom” examines in detail what happens to investors when shooting starts. His first rule supports Buffett – in a war, never hoard cash. Occupied countries have their currencies destroyed, while in the victor nations war debt usually spurs serious inflation, wiping away purchasing power. Hence, you’re far better to hold assets with intrinsic value, or stuff that pays you money to own it.
What about gold? It’s the kneejerk choices of the OMG crowd and, granted, bullion has gained lately as the North Korean situation escalated. Biggs says collecting rocks makes little sense, since you must convert them back to cash to have any utility. Besides, unlike financial assets, you have to store it, hide it, transport it and try to avoid being mugged over it. You can’t really carve off a hunk to buy a meal, nor can you carry it across borders without risk or EFT it to your family. Barbarous relic.
So what else works to practically retain wealth? Land, answers Biggs, especially the kind you can grow food on (not a slanty semi in the city held together with bug spit). Not only will it likely shield you from currency debasement, but you get to eat – which is always a big deal with political instability and hostilities descend.
Stocks? Biggs dittos Buffett. In a war, or times of sustained uncertainty, you never know what the outcome will be, which companies may soar (defence) or dive (consumer) so the best option is to own the whole market. These days, fortunately, there are lots of low-cost exchange-traded funds around giving investors that ability.
The main message here: ignore the sabre-ratting, the disturbers who post telling you to head for the basement and the digital hucksters selling bullion. If a rogue missile flies, or drones invade Korea, markets will lurch – some rising, others selling off. Whether hostility is short-lived or escalates into something nastier should be irrelevant to investors. Going to cash, for example, would be a serious blunder if history is any guide.
The strategy: (a) change nothing. (b) Turn off Wolf. (c) Walk the dog. He doesn’t care.