Investors Advised to Exhibit Caution if Fighting Erupts

Acting rational in an irrational time is investing’s greatest challenge. And now, as America is one day away from the United Nations deadline authorizing use of force in the Persian Gulf, rational thinking is more important than ever.

Although opinions are divided about what stock, bond and commodity prices will do at the onset of any fighting, investment experts believe that there could be a quick and dramatic effect. Moreover, the uncertain economy at home could exacerbate the market swings.

Those who panic could lose all, while those who act cleverly may be able to improve their financial fortunes.

How does one invest in these uncertain times? Conservatively, many investment experts said.

“This is a time for cash and caution,” said Alan R. Ackerman, executive vice president of investment strategy with Rich & Co. in New York.

Many investment experts suggest keeping most investable assets in gold, Treasury bills and cash. Although previous conflicts have boosted the price of defense stocks, some experts say that is not likely to happen this time around.

This may be the first war in history that is fought with “inventory,” noted Michael Metz, chief investment strategist at Oppenheimer & Co. in New York. During the past several years, the United States has built up a substantial military arsenal. Now it is cutting back.

“Do you actually think we are going to increase military spending because of this?” Metz asked rhetorically. “No. The actual dollars involved are going to shrink, not rise.”

There may be a few select companies that profit from war in the Persian Gulf, Ackerman said. They include Survival Technology, which provides antidotes for chemical warfare, and Barringer Resources, which makes devices that can detect hidden explosives, he said.

In the short run, however, stock prices are expected to suffer relatively uniformly if shooting starts. Oil and gold prices, on the other hand, may rise--at least temporarily.

Should you, then, sell stocks and buy commodities? Not necessarily.

War in the Persian Gulf has been anticipated since Iraq’s invasion of Kuwait last August. Consequently, the markets already may have reacted to the news. There is also a chance that the problems will be solved without fighting, which could drive down commodity prices and boost stocks.

In any event, many experts believe that the market swings caused by this war could be brief. The biggest risk that investors face is panic, which might prompt them to sell at market lows, locking in losses that might be erased only with time, investment experts said.

“If war breaks out, it would allow the stock market to look over the valley and say, ‘That’s OK. We are going to win (this war), and the fighting is going to end,’ ” said Ralph Bloch, senior vice president of Raymond James Associates. That would remove selling pressure and encourage some investors to get back into stocks, he added.

Eugene Peroni Jr., director of technical research at Janney Montgomery Scott, said: “Right now, we are going through the most treacherous period of the year. But once we are through this period, I think the market will yield some tremendous buys. Maintain liquidity, and when the market bottoms, use the opportunity to buy.”

But investors need to be exceptionally selective about what they buy, because the U.S. economy is still in tenuous condition. Even if there is no war, it is not a bad idea to keep a good portion of your assets in cash, the experts said. And if you buy stocks or bonds, you should be looking for quality above all else.

“Pay close attention to good-quality companies that have very little debt and that have been able to increase their dividends in good times or bad,” said Geraldine Weiss, editor of Investment Quality Trends in La Jolla. “Hopefully, there will be no prolonged war. So people should focus on surviving a recession instead.”