Deficit Deal: What Should Investors Do?
President Barack Obama and congressional leaders announced late Sunday that the framework of an historic deficit deal had been reached to raise the U.S. borrowing limit and avert a debt default. Is this good or bad news? It’s good news for those who did not want to see the U.S. government default on its debts. It’s bad news for those who did not want the U.S government to raise the debt ceiling (concerns still linger whether or not the U.S. will lose its triple-A credit rating.)
Personal opinions aside, this most recent crisis reaffirmed the following fundamental principles practiced by prudent investors:
- Have a well thought out investment plan
Work with an investment fiduciary to create and adhere to an investment plan that considers your ability, willingness and need to take risk. Events such as the debt ceiling crisis are built into well-reasoned investment plans. As Napoleon Bonaparte stated, “Most battles are won or lost (in the preparation stage) long before the first shot is fired.
- Focus on your long-term investment plan, not short-term events
The impact of the debt ceiling crisis is unknown. History shows that, in the long run, such events are blips on the historic timeline. In 1976, investors obsessed over fear of inflation and a dysfunctional economy (sound familiar?) The Dow Jones Industrial Average traded between 800 and 1000 and many financial gurus declared the “death of equities.” Today, despite the events of 1976 and many other “crises” along the way, the Dow trades around 12,000.
- The media wants you to worry
Always remember that the media’s job is not to provide sound investment advice. Their job is to make people tune in to watch their TV show or buy their magazine. They accomplish this by playing on individual’s emotions and instilling fear that you must take action or else. Its one thing to watch the news to stay informed and another to let it change your long term plans.
If you find yourself worrying about how this most recent crisis will affect your portfolio, you likely do not have a well thought out plan or you were overconfident about your ability to deal with bad news. If the former is the case, then you should develop a plan. If the latter is the case, you should revisit your plan. More specifically your ability, willingness and need to take risk because this likely won’t be the last crisis you (and your portfolio) will have to deal with.