War is breaking out – of course your first thought is your investment portfolio! What are you going to invest in? How are you going to profit?
Firstly, you want to make sure your portfolio is generally well-balanced. You don’t want to be caught out when a resolution is met (more on this later).
Which instruments to invest can, depend on whom the war is fought against and where it is.
We can start by looking at Oil prices.
Let’s take a look back to the last major country-on-country war that the US participated in – the 1990 Gulf War. It’s important that we use this as an example, as opposed to the War on Terror, due to the more ‘surprise’ and zealous nature of the war.
When Iraq invaded Kuwait in 1990 (Kuwait being an OPEC member and holding 8% of the world’s oil reserves), the world was met with a 100% increase in oil prices.
We can note a very sharp increase in oil prices, due to the Kuwait’s role in global oil production.
Back to my point on getting caught out when a resolution is met: had you bought Crude Oil (or a similar) on the day the war officially broke out, then you would have caught the majority of the move up.
However, due to the fast nature of the war and the speed of the resolution, had you still been holding your position on the 28th February 1991 (when the conflict ended) – you would have seen the price drop to below your entry price (around $19 per barrel). Maybe it’s because you tried to let your winner run too far.
That isn’t good.
This is why even in war when prices are soaring, you need to stay mobile and also keep your portfolio somewhat balanced. Only the world leaders involved truly know when they’re ready to throw in the towel.
Many people would say to invest in gold – due to it’s ‘safe haven’ reputation.
Let’s see if this holds true in our case study of the Gulf War.
From the chart, we can see there was an initial 10% rise in price (tiny compared to Oil’s 100% gain). However, prices quickly fell to below their pre-war price. In fact, price spent about as much time below it’s ‘start price’ as it did above it. Time to ‘cut the loser‘.
The final category is Defense Stocks.
We can no longer use our Gulf War Case Study – these ETF’s weren’t around at the time!
Instead let’s look at the most recent tension the US has faced – North Korea.
Between 3rd July 2017 (when North Korea fired their first ICBM), and 11th October 2017, defense stocks rose by 17%.
In October 2017 the S&P 500 Aerospace and Defense Industry subsector index was up 30% on the year. Compare this to the 13% gain YTD on the S&P 500 and we can see that potential conflict is likely the deciding factor.
It has to be said, however, that defense stocks have been rising on a consistent basis (as has the S&P as a whole) since just after this ETF () launched in 2007.
These are the main contenders for investment during wars. In general, however, it should be said that nobody knows when wars are going to start, nobody knows when they’re going to end. As long as your portfolio has elements of each then it may balance out.
Also keep in mind that when a resolution is met, you may find yourself holding the bag very quickly.
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