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Financial Advisor by Vicki L. Marsh

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How Military Action Against Iraq May Affect Your Finances

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The prospect of an extended military conflict involving the United States and Iraq affects Americans in many different ways. As an investor, you may be wondering how your financial portfolio might be affected. To better understand the issue, it may be helpful to put recent events in some historical perspective.

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This is not the first time the world’s financial markets have been affected by an international event – and it likely won’t be the last. But the stock market has a long history of successfully coping with the challenges and price volatility that often accompany an international crisis, such as a military intervention or a major natural disaster.

What’s Happened in the Past? During the Cuban Missile Crisis in October 1962, the Dow Jones industrial average dropped 9% over a span of several days. But within just six months, the Dow rebounded to post a 25% overall gain in value. Similarly, the Dow fell more than 4.6% the day after North Korea invaded South Korea in June 1950. The stock market index bounced back, however, to post an overall gain of more than 9.3% within just one year. More recently, in August 1990, when Iraq invaded Kuwait (an act that ultimately led to the Gulf War), the Dow Jones industrial average lost almost 6% of its value over a six-month period. Yet, just a year after the initial invasion, the Dow Jones closed with nearly a 3.7% overall gain in value from the previous year’s numbers. There have been times, however, when the market has taken longer to rebound from a major international incident. In the wake of the 1941 attack on Pearl Harbor, for example, the Dow Jones industrial average dropped nearly 9.5% over a six-month period. As America entered a prolonged wartime period, the Dow did not regain its pre-war strength for almost two years. Although no one can predict how the market will perform in the future, the past may offer insight into the possibilities. However, you should not rely entirely on the past as an indicator of future investment performance.

Certain Sectors May Be Affected More Than Others In terms of the stock market’s overall long-term trends, times of market instability and unease have nearly always been replaced by periods of stability and growth. However, certain economic sectors may be affected more than others in times of military action. For example, oil companies might benefit if the supply of oil from the Middle East is constrained, resulting in higher crude oil prices. Companies in the travel, transportation and tourism economic sectors may also be affected by a prolonged military involvement. As was the case during the Gulf War, consumers tend to limit vacation and travel plans when conflict breaks out and oil prices rise.

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Stick to an Established Investment Strategy Although overseas events might tempt you to jump in or out of certain investments, make sure that your investment decisions are based on sound financial reasoning, not the latest newspaper headlines. While past performance is no guarantee of future results, investors who have stuck with their long-term investment strategies through turbulent times have often been rewarded for their perseverance. Consider the following tips for sticking with an established, well-rounded investment strategy during times of market volatility:  

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Don’t make investment decisions based on short-term market drops or gains. Even financial experts aren’t able to forecast market peaks and valleys accurately. Attempting to time the market by moving your money in and out of investments is a high-risk strategy that can result in missing out on strong markets by selling too early or buying too late.

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Remain focused on your investment goals. Whether you’re investing for retirement or saving for the down payment on your dream home, it’s important to stay calm during times of market volatility and remember why you invested in the first place – to achieve your goals.

Stay diversified. Keep your investment dollars spread among multiple assets and asset classes, such as stocks, bonds and money market instruments. Such a strategy can help moderate risk.

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Look for buying opportunities. If international events result in a broad market decline, look for stocks that may be undervalued, allowing you to invest in companies with stock that is potentially "on sale." Remember the classic market advice, "Buy low, sell high."

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Turn to an Experienced Guide For specific guidance on how your overall financial portfolio might be affected by recent international events, consider turning to the experience of a professional financial advisor. With a broad knowledge of financial markets and trends, your qualified financial advisor can help you decide on the investment strategy that best fits your personal goals and dreams.

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