In War or in Peace, Diversification Shines

It's no secret that investor sentiment hasn't been anything to crow about recently. However, the most important thing to remember is that no matter what is going on in the economy, or the world, there will always be a tomorrow. And that's what you have to plan for.

To get a sense of what the current economic climate is and the types of investments individuals ought to be looking at going forward, I spoke with Tom Madden, vice chairman of investment management at Federated Investors in Pittsburgh, PA.

Q: The market crashed before 9/11 yet very little seems to be said about that with regards to this war and its economic impact and things on Wall Street haven't been rosy for a number of years now. Are we in a sound enough economic position to go to war without reeking havoc here at home?

A: We had a mild recession in 2001 which was underway before September 11th. It lasted for three quarters and was different than conventional recessions in that the consumer held in and prevented it from becoming a deep recession. And, the Fed moved quickly to cut rates and provide any and all monetary policy incentives---one of those incentives was in the form of refinancing.

As we moved into the first quarter of this year, before war fears really started to heat up, economists were looking at something like 2.5 percent to 2.7 percent annualized real growth in the first quarter.

But, this is not an economic environment where there is a huge amount of resiliency. If things don't go well (in the event of war), the probability of an economic downturn would, I think, rise rapidly if we get into the summer and are bogged down in Iraq.

Q: How do markets behaved during times of war?

A: Over the past few weeks our market has displayed very clear-cut behavior advancing when the probability of war declines and selling off as the probability of war seems to rise. History tells you that our markets haven't started to rally during war time and typically don't until the market can handicap a positive outcome.

Look back to World War 11, for example. The market sold off irregularly until, I would argue, the Battle of Midway was won. Then it became clear-cut that Japan wasn't going to invade the United States and then the market then began a long sustained rally.

Q: What does all this mean for the individual investor. The regular guy or gal or young someone just starting out?

A: The key word is "young". For the individual who has a big chunk of life ahead of them, they ought to be investing on a systematic basis. (Systematic investing means putting the same dollar amount of money into the same account on a regular basis.)

Q: This is kind of a golden opportunity for them in many ways, isn't it.

A: It really is. The market is down and if they systematically invest in a diversified way, balance their investments between stocks and bonds, between domestic and international exposure, the likelihood is that you will compound your wealth successfully.

Q: But how about those 50 and up.

A: For the pre-retirement investor point No. 1 is that high quality bonds ought to be a mainstay of any investment program. And point No.2 is , common stocks that pay reliable dividends---which appear to past the test of being able to maintain those dividends even if economic growth slows back down---seems to be a very intelligent place to head.

A lot of investors are suddenly realizing that price appreciation isn't necessarily the dependable engine for wealth creation. And that it might be a whole lot more important to buy a stock that pays a reliable cash flow and use it to live on.

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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.