10/9/2013 6:45 PM ET|
Default or not, 5 things to remember
Whether the debt ceiling standoff leads to a market crash or just a small disruption, financial pros say it's an ideal time to think about managing risk and protecting your portfolio.
Washington's government shutdown is threatening to morph into something far worse -- a government debt default that some believe could plunge the nation into a crippling depression.
For ordinary Americans, the consequences likely would mean a bear market in stocks, a possible interruption of government payments such as Social Security and Medicare reimbursements, and substantial losses in bonds, where mom-and-pop investors have piled the vast majority of their cash over the past decade.
Of course, reality is likely to be something less extreme though still disruptive.
Financial pros say now's a good time to think about portfolio protection, risk and the lessons we have -- and have not -- learned since the financial crisis devastation.
"People need on an individual basis to continuously reduce their personal levels of debt," said Julie Murphy Casserly, president of JMC Wealth Management in Chicago. "People today for the most part don't have adequate short-term buckets to move through stuff like the things going on in Washington."
Casserly and other financial pros said investor action in the wake of a potential default should break down into five areas: 1) Holding adequate cash levels; 2) not panicking; 3) rebalancing; 4) taking a global investment perspective; and 5) buying downside portfolio protection.
Six months of cash not cutting it?
For generations, the baseline for financial advisors was that clients should hold four to six months of cash to brace against unforeseen crises.
Casserly said she thinks the new paradigm could be twice that -- or more.
"Is six months enough? These cycles last much longer now. The average debt crisis takes a decade to clear out of the system. We had the worst ever, so it's going to take more than a decade," she said. "I'm really wanting people to have somewhere between like nine to 15 months."
In event of a default, the government could end up having to prioritize which bills it pays and programs it funds with whatever cash it has on hand. Transfer payments likely would have a high priority, but the uncertainty serves as a reminder of how important cash is in a post-crisis dysfunctional-Washington world.
"I'm still shocked at how numb people are to having high debt levels," Casserly said.
Keep calm and carry on
Well-known banking analyst Dick Bove at Rafferty Capital Markets expects a debt default to lead to a full-blown depression that could take decades to recover from, and it's a scenario that can't be dismissed.
However, few analysts or economists believe even the current batch of Washington warriors would allow a default to happen.
Making rash investing decisions based on scary headlines, then, could have severe consequences.
"Investors should not panic and should stay the course, remaining focused on their strategic asset allocations," Ashvin Chhabra, chief investment officer at Merrill Lynch Wealth Management, said in a report for clients.
He added: "We urge investors to distinguish between political posturing that may lead to short-term market volatility and those decisions that may have implications for long-term returns."
Jonathan Corpina, Meridian Equity Partners, weighs in on how the shutdown is impacting the markets.
More from CNBC:
- Fed battled over ending bond buying: Minutes
- 'Deadliest Catch'-22: Shutdown may ground crabbing fleet
- What to look for as earnings season starts up
A question of balance
Political turmoil in 2013 has included not only the government shutdown and debt ceiling battle but also a series of tax increases and spending cuts that Wall Street analysts and Federal Reserve Chairman Ben Bernanke expected to clobber the economy.
And while growth may be a shade under par, the stock market has roared, sending the S&P 500 ($INX) stock market index up more than 18 percent.
The downside of such an aggressive move, though, is that individual portfolios can get out of whack.
A balanced portfolio should reflect investor risk appetite, with a healthy mix of not merely stocks and bonds but also the different categories within those broad investment classes -- domestic vs. international, growth vs. value, high-yield bonds vs. investment grade, just to name a few.
The debt ceiling disturbance is a good opportunity to examine allocations.
"In preparation for what could potentially be a rocky month ahead, we believe investors should make sure they have adequate cash to withstand the potential upcoming volatility," Dean Junkans, chief investment officer, and Tracie McMillion, asset allocation strategist, at Wells Fargo told clients. "Investors may want to consider using (market rallies) to build cash positions if necessary and align asset classes to their target allocations."
As part of that rebalance process, investors may want to take a fresh look at international markets.
U.S.-centric stocks have been dominating the landscape for the past two years as Europe has meandered through its debt crisis and China's economy has slowed.
That trend has changed over the past quarter or so, with many foreign markets doing quite well. Investors can play global markets easily through exchange-traded funds that track market indexes.
For instance, China, as measured through the iShares China Large-Cap ETF (FXI), is down about 7 percent for the year but up nearly 16 percent in the third quarter. An ETF representing the so-called BRIC countries of Brazil, Russia, India and China -- the Guggenheim BRIC (EEB) -- is off 1.8 percent this year but up more than 15 percent in the third quarter.
"While September was a good month for US stocks, it was even better (for) international markets," Bespoke Investment Group said in an analysis.
Those with a shorter-term time frame have a variety of means to insure against quick market downturns.
The CBOE Volatility Index, commonly known as the VIX, allows investors to buy options that pay off in the event the market declines. A basic put option on the S&P 500—the ability to sell the index at a designated price point -- is also an easy way to get a better sleep in the event of a near-term market downturn.
Patience, though, can sometimes be the ultimate portfolio protection.
Incorporating all the lessons above -- accumulating cash, not panicking and looking for underbought areas of the market -- all can pay off in times of turmoil.
Quincy Krosby, chief market strategist at Prudential Annuities, said the clear signal from the markets, whether it's stocks, bonds or the relatively meager cost of Treasury credit default swaps -- which protect against a U.S. default -- is that a default is not going to happen.
"It behooves investors to take precaution," Krosby said. "But the overriding thinking is they want to take advantage of a buying opportunity."
More from CNBC:
VIDEO ON MSN MONEY
Too late to clean house Barb,
The WHOLE SYSTEM IS SO CORRUPT now, that it's BEYOND reform. It's GOT TO COLLAPSE. Because it CAN'T reform itself now, and it WON'T let us reform it.
Our way to big goverment has caused this and it is past time to clean house.
I wonder how many know that the so called 700 billion TARP bailout enacted by Bush was simply a smokescreen to pretend short term loans could save banks still facing 20% mortgage default rates? The real bailout was allowing banks to borrow 15 trillion interest free and allowing them to buy treasuries paying 3.7% with that money. We're loaning them money interest free and paying them 3.7% to borrow it back. This plan was enacted in October by Bush's treasury secretary and the fed is still allowing it today. Search real bail out costs.
Consider the budget. President Obama's first defense budget, for fiscal year 2010, was $685.1 billion, if we include the "supplemental" funds for Afghanistan and Iraq (a budget gimmick he had promised not to use.) This was 3 percent higher than in the previous year.
The Obama administration upped the ante again for FY 2011, requesting a base budget of $548.9 billion, plus $159.3 billion for Afghanistan and Iraq, for a total of $708.3 billion.
The President has requested "only" $670.9 billion for fiscal year 2012 -- but the baseline request was actually raised from $548.9 billion to $553.1 billion. The overall decrease comes from a projected cut in operational costs for the wars in Afghanistan and Iraq.
Yet, according to the , Afghanistan will still cost $113.7 billion compared to the $43.5 billion spent in 2008, President Bush's last year. Iraq will be much cheaper than before, but this decline was already in the works. In late 2008, President Bush signed an agreement setting the Iraq drawdown in motion. If anything, Obama has slowed down the withdrawal, and is now petitioning Iraq to stay past 2011. Meanwhile, the stepped-up war in Afghanistan has offset much of the savings we could have expected in Iraq.
And this is just the financial cost. Last year 559 American troops died in Iraq and Afghanistan -- significantly more than the 469 who died during Bush's final year in office.
As a senator and presidential candidate, criticized President Bush's war policies. But instead of changing course, President Obama has tripled down in Afghanistan, widened the war into Pakistan, multiplied the drone attacks, bombed Yemen and Somalia, and started an undeclared NATO war in Libya.
On surveillance questions, presidential war powers, Guantanamo, detention policy and habeas corpus, he has similarly stayed the course, or even expanded Bush's precedents.
Almost none of this had anything to do with killing .
Those who voted for Obama in 2008, expecting a shift in defense policy, must face a sad fact: The United States would have likely spent less money and spilled less American and foreign blood in its wars had the President simply continued on the path charted by President Bush. Instead, we now have Bush ON STERIODS
1st two rules of finance:
#1: A DOLLAR TODAY IS WORTH MORE THAN A DOLLAR TOMORROW.
#2: CASH IS KING !
I've been avocating to everyone I know to reduce their debt- and now you're seeing why.
It might be a good idea now to grow your own vegetable garden, learn to fish & hunt, even get some survival skills- you all might need them very soon.
2) Do not get scared to easily so you abandon your good investment today for far less than you could get and another rich guys will pick it up and become more richer.
3) Have some cash but not a guarantee that the money remains worth the same if things get really bad.
3) Since we can not be sure if the politicians are acting bad cop good cop on behalf of rich people to shake down independent investors so they abandon their investment or not, the best to hope for is that we consume US made products and spend less on imports.
4) Basically stand your economic grounds.
5) remember we created this problem ourselves in some ways. We were to send younger and more flexible representatives and we did not.
5 Things to remember-
1- Obama is a Liar
2-Obama is a Thief
3-Pelosi is a Liar
4-Pelosi is a Thief
5- Obama is a Liar
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market capped the trading week with losses across the major averages. The S&P 500 fell 0.5% to surrender its weekly gain, while the Dow Jones Industrial Average (-0.7%) and Russell 2000 (-0.9%) underperformed. The two indices posted respective losses of 0.8% and 0.6% for the week.
Equity indices were pressured from the get-go after several heavyweights disappointed the market with their earnings and/or guidance, which led to some broader profit-taking. After ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'