RISMEDIA, July 23, 2011— (MCT)—As Congress wrestles with the national debt dilemma, the uncertain future is preying on some investors’ minds. Here with some advice is Jeffrey DeBoer, a wealth management adviser in Roseville, Calif.
Q: If Congress and the president cannot agree on a solution to the debt ceiling issue by the (Aug. 2) deadline, what’s likely to happen to the U.S. stock market? Would it be smart to liquidate my IRAs into IRA money markets and/or liquidate our mutual fund portfolio?
A: The “debt ceiling” is the maximum amount of debt that the U.S. government can take on. For instance, the United States currently has a debt ceiling of just under $14.3 trillion, and the nations’ debt is right up against it. In order to spend past this ceiling, Congress must agree to raise the debt ceiling by August 2.
Believe it or not, roughly 37 percent of last year’s budget was financed through borrowing, so the ability to issue debt is essential to keep the government running. Default is unlikely, but the situation could lead to a partial shutdown of nonessential government services and benefit payments.
Nearly all market observers agree that Congress will raise the debt ceiling; it has done so many times. However, as we’ve seen recently, there will be a lot of partisan bickering over how to reduce the deficit. Most Americans agree that we cannot continue to spend at the current level.
Some economists say if there is not an agreement, we will face a catastrophe in the financial markets. Others believe it will be a non-event. I don’t know who might be right; however, as with most uncertain outcomes, we could see heightened market volatility over the short term.
I do not feel it would be prudent to try to “time the market” and move everything to cash. However, in order to reduce your risk as much as possible, it is important to review your asset allocation and have a solid plan that meets your individual objectives.
Most financial advisers recommend that investors maintain a well-diversified investment portfolio consisting of bonds, stocks and cash in varying percentages, depending on your individual circumstances and objectives. But even with a diversified portfolio, it is important to be aware of the risks.
For example, with a rising national deficit, there is now a greater risk of rising interest rates, which could affect various parts of your portfolio, especially bonds. As interest rates rise, the value of longer-term bonds will typically decrease, so you might consider adding inflation-protected bonds to your allocation.
If you are concerned about severe market shocks, I recommend adding investment alternatives to your portfolio mix that can provide protection in case of severe market downturns, while also giving you a reasonable probability of inflation-protected returns. Some examples of alternative investments that might make sense are managed futures, tactical allocation funds, hard assets, precious metals and commodities.
Although these alternatives can help reduce volatility, it is equally important to be very well-allocated and never put too many eggs in one basket.
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