IInvesting During Wartime: (Part I of An Occasional Series)
With the possibility of war on investor's minds, talking with seasoned mutual fund portfolio managers about how past wars have impacted the markets could help you with future investment picks.
John Carey is portfolio manager of The Pioneer Fund, (800-622-9876). This value-based fund, around since1928, has weathered many wars along with numerous market ups and downs in its nearly 75-year history.
"We've been through a few wars during our history, " says Carey. " World War II, Korea, Vietnam, the Gulf War and a various other smaller conflicts. But every war is different and we're hoping that this situation will be resolved peacefully."
Here's Carey's analysis of how conflicts impact financial planning:
Q: Are wartimes a good time for investing?
Carey: There is really no standard description or expectation that you can have going into something as uncertain as a war or no clear way to play something as uncertain as war---especially in this day and age. But war, in general, is a bad thing economically.
Q: How so?
Carey: In the short run, it can help with an unemployment situation or an under utilized industrial plant, but the dislocations are usually so great, and the damage with the disruption to trade ---even if you are on the winning side as we were in World War II. Also, when your troops come home there may not be jobs for them for quite a while.
Our economy in the United States was just sputtering along in the 1930s and when World War II started. Then, of a sudden we went to virtually fully employment and the economy was booming for a few years. When the war ended and the military personnel came home, there weren't any jobs and we had quite a lengthy recession after that war.
Q: Before the second World War started in 1939, how were the markets doing?
Carey: If you look at the economy during the 1930s, everyone makes a big deal out of Roosevelt's New Deal, but there was a terrible recession in 1937- 1938 and a stock market crash and down turn. That was also in the time frame of when Germany invaded Austria. Then it took until the early- to mid-1950s --after the Korean War---before the economy really started moving again.
Q: How did the markets fare after Vietnam?
Carey: Vietnam was a mixed bag economically. When it ended we had a terrible recession in 1973-74, high inflation, and problems in the Middle East, so we had higher energy prices.
Q: How are you, as a portfolio manager, investing given this current scenario?
Carey: Pretty much as we always have. We're always very conservative. Always looking out over the long term. That's at least three to five years, although we hold on to the stocks in the Pioneer Fund, (PIODX), for an average of between six and seven years. But when we make our initial investments, we aim to forecast out only three or four years.
We're investing on the basis of the underlying earnings recognizing that there are going to be international events, there are going to be domestic events, there are going to be natural disasters, there are going to be all kinds of things that occur in the meantime that can upset the market or excite the market. And we can't forecast those things.
What we can do is look at the companies, their earnings and the quality of them and how their businesses are structured. We can also look for companies with dividend income and invest on that basis. It's a very value-based approach to the blue chip market and that's how we've managed this fund since 1928.
Q: Are you finding many values in this market?
Carey: Oh yes. There are lots of interesting things to buy right now---and right across the board from technology to consumer goods and basic materials to financials. But I think anybody buying needs to be very patient and to recognize no one can forecast how the market might do short term, especially with such big uncertainties as we have right now regarding a possible war and terrorist threats. The fundamentals look pretty good but psychologically, international events could pay a role near term. So, I think anyone investing should be looking at this as a three to five year proposition on the expectation that these problems will be behind us within that period of time. I certainly hope that's the case.
Dian Vujovich is a nationally syndicated mutual fund columnist, author of a number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.
To read more articles, please visit the column archive.