With the ongoing talks on debt, there is a lot of tension in the country. Although lawmakers are reassuring the public that everything is going to be ok, people are still wondering what will happen if the government defaults on its debt. This basically shows how indebted we are as country, and how long it will take before the credit rating agencies downgrade our rating. Even though the chances of defaulting on the debt obligations are very slim, this should be a wake up call that we seriously have to consider our way of spending. But right now, what many people are looking at is whether the debt crisis will have an impact on their retirement plan as illustrated in the following article by Seth Fiegerman.
The longer the debt ceiling debate drags on in Washington, the more worried many Americans are becoming about whether and how the debt crisis could affect their long-term investments. But according to several financial planners, the biggest thing casual investors have to fear at this point is fear itself.
“I think this is having more of an impact on people’s emotions than it is having from a pure economic perspective,” says Mark Singer, a certified financial planner and author of The Changing Landscape of Retirement. “There have been a string of really bad headlines, not just about the debt ceiling crisis, but also the euro, the NFL lockout and other events that make people think everything looks bleak.”
Singer says he’s found this to be particularly true of those who are five to seven years away from retirement and worried about whether they need to overhaul their investment formula to weather the tough economic times. But as Singer and others contend, it’s unlikely the financial world will be turned upside-down next week.
Most analysts expect lawmakers will approve one of the debt ceiling bills before the Aug. 2 deadline when the U.S. would begin defaulting on its debt payments, and even if legislators miss that date, it’s likely the U.S. Treasury would work to juggle around funds to temporarily continue making payments until a bill is approved. Indeed, the greater concern right now is not default so much as the U.S. having its credit rating downgraded unless lawmakers approve a strong plan to tackle debt and ensure the country’s long-term fiscal stability.
If the country’s credit rating were downgraded, Rose Greene, a certified financial planner with Rose Greene Financial Services, argues municipal and treasury bonds could be affected, and potentially corporate bonds as well, but the impact on investors would likely not be long-lasting.
“Even if this happens, it would be a very short-term event, which is why almost all professionals are counseling to hang in there and not act precipitously,” Green says. “When we look at the downgrading of other country’s debt, like Japan or Spain, they only witnessed a negligible change in their government’s 10-year yields, not some kind of end of the world hit.”
Needless to say, even short-term turbulence in the bond and stock market may scare those planning for retirement, but each of the financial planners emphasizes the need to stay calm and stick to traditional long-term investment strategies.
“Everyone has their own risk tolerance, and everyone’s portfolio is different, but as long as you have a good, balanced portfolio with no really volatile stocks and a little built-in hedge in there, you should be fine,” says Angela Thompson, a certified financial planner with Coast Financial Planning. “And if you’re retiring in the near future, your portfolio should already be structured with a conservative bent to it, so you wouldn’t have high-risk investments.”
For those who are particularly worried about the pending debt crisis, there are some basic tweaks you can make to your portfolio to better insulate yourself.
Singer, the author and financial planner, suggests allocating more of your funds to alternative investments such as emerging market funds, which are not as deeply tied to the U.S. stock market and may therefore fare better. On the other hand, Vanguard Group spokesman John Woerth says these investors might also be shifting some of their money out of traditional stocks and bonds and into stable value funds, which are not as subject to the ups and downs of the market during tough times.
How much you should shift around your money ultimately depends on you.
“If you are overly concerned, we would say sell down to the sleeping point, meaning that if you want to reduce your exposure to the stock and bonds markets, not dramatically but enough to help you sleep at night, you should do so,” Woerth says.
Of course, there are likely some reading this who are eager to cash out some of their investments to play it safe, but Greene cautions investors against going overboard with this strategy.
“If they are really sick to their stomach with anxiety, they can go to cash, but the problem is they will probably never come back [to the market],” she says. “And for some near-retirees, the danger there is outliving their money.”