FOOL ON THE HILL
Ready for War?

Faced with the possibility of war, Americans seek general and financial security. Tom Jacobs explains what you can do now to protect yourself and your financial future. In short, war isn't the time to dump stocks. Far from it. Here's why.

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By Tom Jacobs (TMF Tom9)
August 29, 2002

Been following the national debate on Iraq? While concerned about the security of our nation and the world, we're all thinking, "Hey, I'm patriotic and willing to make necessary sacrifices, but I'm also responsible for my own (and perhaps others') financial well-being. Should I prepare for a possible war with Iraq? Are there things I can do to protect myself financially?"

If you're like me, you feel better if you do something. But check yourself to make sure it's not action for action's sake, and that you aren't making things worse. There are productive measures to take, and while they include thinking about stocks (we'll get to that later), start with your most basic finances. 

No, I don't have tips on defense stocks or advice to rush into gold. Rather, I've got specifics all over the financial map to back up these handy familiar phrases:

"Praise [insert appropriate spiritual figure here], and pass the ammunition."

"Speak softly, but carry a big stick."

"Hope for sunshine, but prepare for heavy weather."

Or, if sports suit you, "Root for the Red Sox, but put money on the Yankees." (I'm taking cover!)

Freedom's just another word...
Most people's basic fear is that steady income will be disrupted or that an emergency expense could catch them at a bad time. The solution: Strive to have three-to-six months of living expenses in a short-term savings vehicle. (No, not a car!). It's simple, but not necessarily easy. We all feel pressure to spend ready cash, which is one good reason rulemakers were smart to prevent tapping into your 401(k), except in extremes, and withdrawing IRA funds without penalty before age 59 1/2.

It's hard for most people to forego current need -- or current pleasure -- for future gain. Need help doing so? Find support on our Living Below Your Means discussion board. No doubt, a short-term savings fund will make you feel freer, even if you never have to use it. I didn't have one until age 40, and life feels different. If The Motley Fool told me tomorrow to write nothing but a daily cooking column, I could say, "Stew you!" with at least some impunity. 

Home sweet equity
If you're fortunate enough to have a home equity line of credit exceeding the amount of a reasonable rainy day fund, you might consider that an emergency fund. In most cases, interest on amounts you borrow is tax deductible against ordinary income. Caveat: You do have to repay yourself (cool!) what you withdraw, and terms vary -- so be sure you know what they are. Sure, you have to replenish your rainy day money market fund, too, but the terms of your home equity line may add some pressure. If you consider your home equity an emergency fund, remember to keep it that way, and not use it for other purposes.

Civilian to military? 
An emergency fund helps if there's a chance you could be called to serve in the armed forces. Are you in the Reserves, for example? First, there's a 1994 law (known, for brevity's sake, as USERRA), requiring employers to reemploy service members who meet certain criteria after they serve. That can provide some peace of mind, but what about while you're gone? You will be paid, of course, but make sure you have an emergency fund to take care of dependents and other expenses in your absence.

Wills, insurance, medical power of attorney
If you don't have 'em, take care of them now. Many don't like to discuss these things, and couples often find this to be the most difficult aspect of the relationship. But it's responsible to do so, and you'll feel you have more control after you sort everything out. Often, you don't need a lawyer, or you can find one to help for an agreed-upon fee.

If you're not married, who should make medical decisions if you're incapacitated? If you're injured in conflict, are others properly insured, and does that insurance cease if you're injured in a military setting? Talk to your mates, relatives, and friends. Consult The Motley Fool Money Guide or TMF Money Advisor.

And finally, stocks!
David and Tom Gardner's new book, What to Do With Your Money Now, contains helpful history on U.S. market actions following acts of war, terrorism, or natural disasters. What the numbers show repeatedly is that whether it's Pearl Harbor and World War II, the invasion of Kuwait and the Gulf War, the Oklahoma City bombing, or Hurricane Andrew, the major market indexes sometimes (but not always), decline at first, then always rise higher within a few years.

These numbers bear out the views of one of the greatest investors and money managers, Phil Fisher, whose Common Stocks and Uncommon Profits was one of the three non-Motley Fool financial books recommended to me before working at TMF. Fisher advises that if you've already selected a stock after careful research, don't be afraid to buy on a war scare -- subject to some caveats. He notes that if war develops, markets may be depressed until the conflict's end is visible. But they eventually rise. Buy or hold, he explains, because war usually brings inflation, battering the purchasing power of cash.

This is a quick summary of both books, which I recommend for fun and profit. Beginning investors can also enjoy our 13 Steps to Investing Foolishly. We wrote lots of useful stuff after Sept. 11, too.    

Those who fail to plan...
The best advice is to hope, believe, love, and help, but also to pass the ammunition, carry a big stick, and be prepared for heavy weather. In our financial cases, that means paying down debt, establishing a rainy day fund, taking care of important personal affairs (such as wills and insurance), and recognizing that steady, long-term investing in stocks doesn't change in a war.

The past is no guarantee of future results, but it's all we have to go on. And it will make you feel secure.

Stay Foolish!

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Tom Jacobs (TMF Tom9) sings The Beatles' "Eight Loads A Week" while doing his laundry. Whatever. Who is this guy? Check out his profile and The Motley Fool's disclosure policy.