Investing and the Debt Ceiling: Our Thoughts

As this is written, mid-day on Monday July 25, 2011, Congress and the White House are at an impasse on resolving the impending debt ceiling limit, which must be resolved by August 3rd.

How should an investor react to this situation?

As clients and readers of this blog know, we advise clients to focus on the “long term” and on events that are within your own control, when developing your personal investment plan/strategy.

There are always going to be events and issues that cause investors stress and uncertainty. The financial markets do not like uncertainty. As uncertainty rises, markets tend to fall. However, the “financial markets” are really made up of individuals each making decisions, either on behalf of their individual portfolios or individuals who work for large institutions or brokers and financial advisors.

It is nearly impossible to act in a profitable manner, by anticipating future events. For example, the financial markets rallied last week, as progress (unexpected good news) was made on the debt limit issue. As that progress turned into a stalemate over the weekend (unexpected negative news), many expected the financial markets to drop significantly this morning. As I write this, the US markets are down less than ½%, which would be a surprise to many.

We would not recommend adjusting your portfolio in reaction to this specific event, assuming that you have a proper asset allocation and financial strategy for the long term. It is reasonable to expect some additional stock market volatility (meaning losses), if no progress is made in the next few days. It is not a winning strategy to make significant portfolio changes in response to specific events. It is almost impossible to time the markets, to be able to sell stocks at the right time and then buy back in at the right time.

We are concerned that our elected officials are not able to resolve these matters until the last minute, which is unsettling. However, we feel that the need to resolve the issue will prevail, though it may be a bumpy process. In the long run, the increased focus on Federal fiscal responsibility is important and it is being addressed, regardless of one’s political views.