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The Debt Ceiling Crises and Your Portfolio

English: Chart of the United States' debt ceil...

Nobody can forecast whether the politicians in Washington will ever put aside their childlike bickering and address the debt ceiling issue. I have been in the financial advice business since the mid 90s and have seen any number of financial crises come and go. Certainly if the debt ceiling is not raised there could be dire consequences in the short-term.

Much has been written about the potential implications for the financial markets if the government does not increase the debt ceiling by the August 2 deadline. Among these are:

• Higher interest rates that could arise from a downgrading of U.S. Government debt. This increase could potentially ripple through not only the debt markets but could also increase interest rates for consumers on all sorts of loans including credit cards, auto loans, and mortgages.

• These rate increases would likely put a damper on consumer spending, car buying, and home purchases weakening an already fragile economy.

• A default, even a short one, could also lead to a reduction of liquidity in the financial markets for both stocks and bonds.

While none of this is good news for investors, in my opinion investors who may be considering making drastic adjustments should think long and hard about making changes to their portfolios simply to combat this potential crisis.

Financial crises come and go. Whether the Asian Contagion: the Long-Term Capital situation; the bursting of the dot-com bubble and the ensuing decline of 2000-2002; or the recent melt down of 2008-2009 we continue to experience dire situations that lead to (in some cases) steep and brutal declines in security prices. As painful and scary as these declines can be, what is more painful to many investors is selling out near the bottom as we saw in late 2008 and early 2009. Yes their losses were painful, what was worse was locking in those losses and not being in the market to recoup much or all of what had been lost via the tremendous market rally that ensued.

Market timing is a fool’s errand. Maybe you will avoid short-term losses by getting out now. When will you get back into the market? Is getting out and avoiding a potential market drop worth the risk of losing out on future market gains? What if the markets don’t experience a drop due to the debt ceiling situation? What if Washington comes to its collective senses and deals with this issue in a responsible fashion?

What moves will you make? Stocks, bonds, Treasuries, and even money market funds may all be at risk in the event of a US default. I’ve read that the two safest havens are the Swiss Franc and gold. Will you move all of your assets there? I’ve also read that if the default crises is averted these two safe havens could take a short-term hit.

While I know that I sound like a financial planner, this strikes me as a time to make sure that your portfolio is adequately and properly diversified for your long-term needs. This is a time for common sense and a reasoned approach. Don’t be swayed by the talking heads on the cable financial news shows.  Do what’s right for you and your family.

As always please feel free to contact me if I can be of help.

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  1. Well put; I bet there will be plenty of sellers tomorrow following today's "carnage" – only to see shares rebound next week when some sort of deal is achieved.

  2. Thanks for your comment. I couldn't agree more. As an advisor I find this sad, panic generally leads to poor investment decisions. Case in point those investors who sold near the bottom in '08-'09 only to miss out on the ensuing rally. Realized losses compounded with lost opportunities to make some or all of the losses back.

  3. Good information. I agree with your views on market timing…"When will you get back into the market? Is getting out and avoiding a potential market drop worth the risk of losing out on future market gains?"

  4. Thanks for the comment Chuck.

  5. I am starting my financial planning and don’t want to pay too much… Does anybody know what you would pay for initial planning stages?

  6. It will depend upon your situation. In my case I look at each clienet's unique situation and quote a flat project fee. Other planners might charge by the hour. I good first step is to contact a local planner and discuss your situation with them.

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