Debt ceiling battle: What you should do now

If you've been taking chances you shouldn't with your retirement funds, now is the time to correct that.

By MSN Money Partner Jul 29, 2011 6:57PM

This post comes from Liz Weston of MSN Money.

A default is not Armaggedon.

We in the media need to make that clear. We've been excoriating congressional bungling and inaction so loudly that many ordinary people are getting the impression the world is about to end.

It's not. A default would have some seriously bad effects -- including raising the interest rates on the national debt that everyone professes to care so much about. One of the basics of money management is that if you're in debt, you want to keep your interest rates as low as possible to get out of debt faster. Doing something that makes your interest rates rise is just stupid. But right now, "stupid" is Congress' middle name.

So, what can you do with your own money to prepare in case we do default? My thoughts:

Move your cash from money markets to FDIC-insured bank accounts. The average interest rate on money market mutual funds is 0.25%, and they aren't federally insured. The risk that money funds would "break the buck" and lose principal is probably minimal, but you're not being compensated for taking any risk, so you'd be better off in an online bank account paying 1% or so.

See Liz's blog, Ask Liz Weston

Don't invest in gold. Gold is a hugely speculative investment. The gold bubble has been growing for years, and the last time this happened the crash was pretty awful. In fact, the price of gold still hasn't climbed back to its previous 1980 peak in inflation-adjusted terms. Buying gold or gold mining shares right now is gambling, not investing.

Make sure you're diversified. Bailing out of the stock market isn't a good choice. Congress will get its act together eventually. If it doesn't do so before the default, it will do so quickly afterward, once the stock market plunges. Either way, if you're out of the market you'll miss the relief rally.

In any case, trying to time the market is all but impossible. If you're invested in a broadly diversified mix of stock and bond mutual funds, you should be able to hang on for the bumpy ride. (One way to get quickly diversified is to put your money into a "lifestyle" or "target date" fund, which does all the diversification and rebalancing for you. Most workplace retirement plans and brokerages offer these.)

But remember that money you'll need within five years should be in a safe, easily accessible bank account, not invested in the stock market. That's true under any market conditions, but if you've been taking chances you shouldn't, now is the time to correct that.

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6Comments

Best

Aug 1, 2011 8:58AM

Keeping interest rates low has a smaller effect on debt than does spending less than your income.

As long as Congress keeps approving spending which exceeds revenue, I must agree that they are acting "stupidly".

However, the first real attempt in a decade to rein in profligate government waste does not seem to be stupid in my opinion.

Previous replies

Rick Garrand (R Meun)

Jul 31, 2011 12:00AM

Blaming Congress for years of the federal govt spending beyond its means is an overly simplistic partisan cop out. The govt must live within its means just like the average American has to.

Previous replies

JohnnnyBeGood

Aug 1, 2011 12:16PM

Gold is not in a bubble this guy that wrote this; his head is in a bubble with this debt deal congress makes, look for gold to go to 1800-1950 and silver to go over 62 on its way to 90..look for the death of the dollar.

Previous replies

Someone (yes man 259)

Aug 1, 2011 10:53AM

Advice for today, for retirees and soon to be retired: As one poster suggested, to pull all your money out of your 401k, I do not agree with. Taking all of your money out, could put you in a higher tax bracket. The better idea, would be to look at your 401K, and have the right mix of stocks and bonds. As a person gets older, they should have less in the stock market, and more in bonds and in FDIC insured banks, if you do have money in bonds, avoid long term bonds, interest rates will eventually rise, and long term bonds, will lose principle. Better alternative, is short term bond funds. Principle will be lost in short term bond funds, with a rise in interest rates, but the loss of principle will be small vs. long term bonds.

Previous replies

faraway look

Jul 30, 2011 5:20AM

To my way of thinking, it might be better to react quickly. If you are 59 1/2 you should already have: your money out of your 401(k). The safe side might be the road to take. As far as certificates of deposit, that ties up your money at low interest.
Stocks on the other hand should be sold and put into the money market fund of your broker. Hanging onto the market was good for 20 years ago. With computer trading and people that can bet that the market will go down, pulling out of the market is safe. There is no defense against a drop in the market of 20%, from the close to the open. I agree you will not catch the whole of the upswing. Not catching any the downswing is good too. Hopefully it will be a broad and continued upswing, that you can tag along and still make some money.

Previous replies

Delmar Fairchild (DelofBarron)

Aug 2, 2011 9:22AM

If you are looking for interest rates, you may just as well keep your money in Stocks that pay dividends. Some examples are ATT, O, KMP, WES, ARCC. Telephones will never go out of style, good real-estate keeps its value, Natural Gas will be the new Oil when the economy tanks and money will always have to be borrowed for start ups.

Many insiders are waiting for their stock to drop so they can bet big. They know the value of what they are doing, so look for stocks that have heavy insider buying.

Previous replies

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