Should defense stocks be part of your investment portfolio?  My short answer is, yes, but only a very small portion.

Defense stocks have done ok in the last decade.  They have done better than the broad market.  We would have expected them to do even better considering the fact that there have been 2 major wars.

The stock market is still on very shaky ground.  The economy is trying to deleverage, but the government is trying to prop things up with stimulus packages and fiat money.  It is a tug of war.  The overall stock market is very risky right now if you are not diversified outside of the stock market.  Any one individual stock is highly risky at any time.  Therefore, if you invest in defense stocks, it would be best to diversify.  Fidelity has a nice mutual fund that you can invest in (symbol: FSDAX).

I wouldn’t put more than 2 or 3% of your entire portfolio in defense stocks.  They are just too risky.  The defense stocks may benefit from more war, but even that is questionable.

Some libertarians will question whether it is ethical to buy defense stocks because the companies are profiting off of war.  While that is an individual decision, my opinion is that buying some company stock isn’t going to affect whether or not a war will be fought.  As long as you aren’t cheering for more war because you are looking for bigger profits, then I don’t see a problem.  If it was a problem, then you also wouldn’t be able to buy U.S. government bonds and a whole host of other investments.