Commentary by Kyle Handley
Financial Planner

A project to create a financial market in geopolitical turmoil has already been scrapped only days after details were unveiled to the public.

A division of the Pentagon, the Defense Advanced Research Projects Agency (DARPA, www.darpa.mil/iao/FutureMap.htm ), had plans to create a futures trading market for speculative trading on events in the Middle East. The plan was disclosed Monday by outraged Democratic Sens. Ron Wyden of Oregon and Byron Dorgan of North Dakota and was scrapped by Tuesday.

Why all the fuss? The futures contracts that were envisioned would have allowed traders to buy financial instruments predicting the likelihood of certain events. For example, a trader could purchase a contract based on the probability of Yasser Arafat being assassinated in the 3rd quarter of 2003.

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The unfortunate side effect is that you could purchase such a contract, assassinate Mr. Arafat and then get paid by the financial markets for your criminal actions. The model was a futures trading program developed by the University of Iowa to predict presidential election results (http://www.biz.uiowa.edu/iem/).

Similar markets exist for the price of oil, movements in exchange rates or the value of the S&P 500 stock index (www.cme.com). They allow investors to hedge their bets by locking-in future prices today, thus protecting against volatility and uncertainty.

Alas, the idea of hedging your portfolio against or even profiting from assassinations, military invasion or terrorist attacks seems distant and creates a moral dilemma. So what can you do protect yourself from the unpredictable?

That brings me to my final point and back to basic investment principles. Focus on what you can control. Maintaining a diversified investment portfolio with a mix of stock and bond mutual funds is about the only thing you can control. Future stock, bond and real estate prices are unknown.

You should be able to weather the short-term fluctuations in the market from rare or traumatic events such as terrorist attacks or war if you can stick to your investment discipline over time.

In the grand scheme, economic growth statistics, which party is in the White House or even military conflict are just noise in a historically upward trend for the stock markets. Sticking with a comfortable asset allocation is the best way to hedge your bets in the long-term. I'll discuss determining an appropriate asset allocation in a future column.

Kyle Handley is a financial planner with Capital Financial Services, Inc. in Madison, Wisconsin. He can be reached with questions or comments via his website at www.capfinadvisor.com or by phone at (608) 661-5405.