Sensible-Investor: In search of a patriotic portfolio

   A patriotic investment portfolio sounds so appealing. We're willing to enlist our individual finances, like so much else, in our impassioned search for satisfactory responses to the terror attacks of Sept. 11, 2001, and now to the Iraq war.

flag200 Patriotism and Wall Street. They don’t ordinarily go together, but people are looking for a connection. The search is on for patriotic companies, patriotic stocks, and patriotic investments  -- ways of supporting American values through patriotic investing.

It's too bad that most suggestions for investing patriotically have been deeply flawed -- good-hearted, high-minded, but wrong-headed.
   Nothing's inherently wrong with the idea of putting individual citizens' personal finances to work rebuilding the parts of the nation that sustained the greatest damage. But common notions of accomplishing that through the stock market are based on fundamental misconceptions about how the financial system works.
    In the days before the stock markets reopened Sept. 17, 2001, many small investors endorsed the idea that citizens should buy stock to show support for the United States and the financial system that the terrorists had temporarily disabled.
    But suggesting that it is patriotic to buy stock and, by implication, that it's unpatriotic to sell stock misses an obvious point: Except during an initial or secondary stock offering, stock is traded back and forth, with a seller for every buyer. You can't have a patriotic buyer without an "unpatriotic" seller - it's a wash. That's neither patriotic nor unpatriotic; it's just how the system works.
    Sure, if a noticeable portion of the American public decided to shift assetsinto the stock market, that would have some effect. Stock prices would move higher because demand for stock would be higher. But why bother? Treating the stock market as a referendum on the American way of life doesn't make it so. The market reflects investors' evaluations of earnings potential of individual companies, not their vote on the future of the United States.
    The fact that share prices fell in the week after 9/11 suggests that this variety of financially patriotic investor remained a tiny minority, despite the upsurge in traditional patriotism nationwide.  That doesn't mean investors were un-American. Instead, in their stock purchases and sales, investors were reflecting their revised expectations for companies' future earnings in light of the blow that the economy has sustained.
    In any case, patriotically motivated investments in the stock of American companies would have little direct effect on the companies themselves. If a company's stock rises, it gains some additional flexibility for future financing and its executives are delighted to see the value of their stock options rise. But companies don't get any money directly when their shares rise, or lose money directly when their shares fall.
    Even a portfolio that consisted entirely of defense companies, or entirely of flag companies, wouldn't be especially helpful to the companies - and would be needlessly risky for the investor.
    In a sense, trying to support the nation through personal investing is like trying to back the armed forces through our choice of wallpaper or to demoralize Osama bin Laden through our video selections. The two don't intersect.
    So, is there no way a patriotic American can support the country through the stock market?
   In a general way, we can -- by remaining involved in the financial system. The nation wouldn't be as strong as it is without its small and large investors - together we provide the capital that makes capitalism strong. Both for the good of the nation and for the good of individual investors, now isn't a time to retreat from the stock market.
   It's even possible to create a patriotic portfolio and not be an idiot about it.
   One approach would be to purchase the equivalent of every stock on the market -- by buying shares of a total market index fund. That supports the nation's economy and keeps your portfolio widely diversified.
   If that's too abstract for you, it would be a simple matter to create a red, white and blue portfolio that's a patriot's equivalent to the "socially responsible" portfolios of liberal or religiously motivated investors.  Instead of shunning companies that sell tobacco, exploit workers or profit from nuclear power, as many socially responsible investors do, a patriotic portfolio would invest in companies supporting or representing the United States.
     Your patriotic portfolio might invest in companies that carry the country's image overseas - McDonald's, Disney, Coke, and even Microsoft.
    It might invest in companies that support the country's war effort, such as defense contractors Raytheon and Northrop Grumman. .
    The portfolio might simply invest in companies that legitimately call themselves American - American Airlines, American Home Products Corp., American Greetings Corp. and, of course, American Eagle Outfitters Inc.
   If the patriotic stocks are a diverse group, this patriotic portfolio need not present a great financial risk, especially if the patriotic stocks aren't its only holding.
   At a minimum, it should counterbalance its stock holdings with some bonds - U.S. Treasury bonds or perhaps
old-fashioned  U.S. Savings Bonds that now been updated  with the words “Patriot Bond” printed on them.
   Admittedly, the benefits of this type of investment strategy -- just like a socially responsible portfolio -- would be mostly psychological. Patriotic investors would know that their hearts and their finances were marching to the beat of the same drummer. The companies in their portfolio won't really hear the drumbeat, but that wouldn't be the point. The point would be much the same as flying an American flag -- expressing support for the nation and doing what feels right.

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