Don't let confusion about Iraq lead to investment mistakes, planners say.
NEW YORK (AP) -- As Wall Street worries about a possible war with Iraq, it can be hard for investors to manage their portfolios given the uncertainty. But financial planners say there are ways to avoid costly mistakes.
Stocks have slid in recent weeks, giving back the gains from their big New Year's rally and then some, largely because of war concerns. Analysts have said a conflict could lead to higher oil prices and depressed consumer spending, leading to weaker corporate profits.
That has complicated matters for investors who after three years of declines were looking to adjust their holdings. But advisers have some suggestions:
Refrain from basing investment decisions on one-time events.
Some analysts believe stocks will rebound once a war begins, based partly on assumptions the conflict will be quick and successful. However, no one can know if that will be the case, or how Wall Street might react -- particularly over the long term -- if there is a regime change in Iraq.
"I can't predict the future, so I don't advocate timing in any format," said Dan Candura, a certified financial planner in Boston.
He suggests developing a strategy based on investors' longer-term goals of five years or more. The objectives should focus on what investors hope to accomplish, such as buying a home or saving for retirement, rather than getting the highest return.
"Having an asset allocation strategy eliminates the need to react to news events and the 'crisis du jour,"' Candura said. "A good financial plan can help people deal with these events without having to ask, 'Do I need to change things?"'
Reassess your risk tolerance.
A sound strategy should help a portfolio through stormy economic periods, but if investors still feel they can't stomach the volatility, they should eliminate riskier investments.
For example, it might be worthwhile for an uneasy investor to consider more conservative vehicles such as bonds or money market funds. But investors should remember that the tradeoff is a lower return over time, making it difficult to recoup steep losses from the bear market.
Think twice before jumping into the traditional safe havens of gold and bonds.
These assets make sense as part of a financial portfolio, but loading up on them on fears of war could hurt investors' long-term growth.
That's because gold prices already are near six-year highs due to the past year's stock market turmoil, and bonds are selling at a premium after the recent string of Federal Reserve interest rate cuts that many believe are over.
Even storing cash for a long period can be counterproductive, since yields of money market funds remain at all-time lows.
Financial planners say parking cash in a money fund or municipal bond might make sense for a short while until the stock market stabilizes.
"I would consider looking at some kind of state security, a city or state bond, that pays a relatively high return," said Ian Quan-Soon, a certified planner in New York. The security is tax-free, he notes, and a good option since "you can't put money under a mattress."
Don't give up on your 401(k).
The stock market declines may have some investors wondering whether lowering their 401(k) contribution and taking the cash instead may be the better bet. Avoid the temptation, says Patricia P. Houlihan, a certified financial planner in Fairfax, Va.
She says investors are better off putting their contributions in more conservative vehicles in their 401(k), such as a money market fund, at least for the time being; they can then later switch the cash over to the stock portion of their account.
That way, investors can preserve their tax savings and get their employers' matching contribution while building their retirement savings, Houlihan said.
Hold on to stocks and consider buying more. Planners say if investors are able to tolerate some declines, stocks remain a good value over the long-term, particularly once tensions with Iraq are resolved.
"If we put this in historical context, we've already been through a stock market crash, we're entering a war" and stocks already have declined three years in a row, a feat rarely seen, said Quan-Soon.
"If investors have been invested in the past five years, I would not recommend retooling, because they've already suffered through the worst," he said.