The possibility that the US government may be unable to pay its bills as early as next week has generated tremendous press.
Investors may ask: should I do anything, and if so, what?
There are several steps you can take. But they may not be what you think.
First, some background. According to our friends at Dimensional Fund Advisors, Congress has raised the debt ceiling 78 times since 1960. On several occasions – notably in 2011 -- it took extended negotiations and noisy brinksmanship before the ceiling was raised. We are in a similar stand-off now. In the past, the government has always raised the ceiling and has never defaulted.
The 2011 stand-off was instructive for several reasons. First, the stock market dropped about 15% within a month. We have not seen such a reaction so far. In 2011, once the crisis was averted, the market rebounded and finished higher for the calendar year. Second, Standard & Poor’s, one of the two major credit rating agencies, lowered the rating on US debt from the highest level of AAA – where it had been for decades – to AA+, the next highest rating. Despite the downgrade, the price of US government bonds went up, not down.
The Debt Ceiling Deadline and What You Should Do
- Focus on what you can control and ignore what you cannot control. Your financial plan is the key to your financial success. Follow it, just as you would follow it if there were no potential crisis looming. Your plan should guide you on how much to save, how much you can spend, what percentage of your investments should be in stocks vs. bonds, how much and what types of insurance you need, what to do to minimize long-term tax and other goals. Following your plan is something you can and must control.
- Confirm that you have a sufficient cushion of cash and short-term bonds which you can access for spending in a crisis. If the stock market were to drop, you would want enough cash or cash-like investments so you do not have to sell stock or long-term bonds until they recover.
- Call your two US Senators and your US House Representative and urge them to resolve this issue the way nearly every major disagreement in government is resolved: with give-and-take between adults who want to do what is right for our country. (To find your representative’s details, use this handy link.)
Last November, when we hosted our annual event for clients and friends, the theme was “Keep Calm and Carry On”. That was in the wake of a difficult first three quarters of 2022. The stock and bond markets recovered, as they have always done. They will fall again – maybe very soon, or maybe not. Then they will rebound, as they have always done. Spending time trying to divine the future will only lead to frustration and anxiety. Keep calm and carry on, focused firmly on your financial plan.