US downgrade: What should individual investors do?

If you're panicked, your portfolio might have been wrong to begin with. You need a plan for bad times as well as good. Here's what to do -- and when to worry.

By TheStreet Staff Aug 9, 2011 11:04AM

By Seth Fiegerman, MainStreet

 

The U.S. had its credit rating downgraded from AAA to AA+ late Friday by Standard & Poor's for the first time in history, but despite the concern among consumers and investors, financial planners argue the downgrade isn't reason enough to make any drastic changes to one's portfolio.

 

"If the portfolio you own is properly diversified and if your long-term goals haven't changed, then you should not be making any changes because of this," says Ric Edelman, a prominent financial adviser and the founder of Edelman Financial Services. "Our concern is that a great many consumers don't have a diversified portfolio."

 

Post continues after video:

As several planners point out, the country's credit rating was downgraded by just one of the three major ratings agencies and remains at a level on par with some of the most stable countries and financial entities in the market. Moreover, the ratings change does not actually change the country's ability to pay back its existing debts.

 

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For these reasons, the downgrade should not significantly alter the rules of the road for casual investors. Consumers should still maintain a portfolio with a healthy mix of stocks, bonds and alternative investments at a risk level that allows them to feel comfortable.


"If you are panicking, that suggests your portfolio is not properly diversified for your situation and is too risky for you," Edelman says. "You need to own a portfolio that you can own during the bad times."

 

That said, there are some slight tweaks investors could make to their strategies in light of the downgrade news and its aftermath.

 

Stocks

The turbulent stock market may frighten some onlookers, but financial planners argue that now is the time to invest more heavily in stocks if you have the resources to do so.

 

"The goal with investing is to always be buying low and selling high," says Paul Jacobs, a certified financial planner with Palisades Hudson Asset Management. "We'll be selling from our cash and bond allocations, which are doing well, and buying stocks."

 

Jacobs argues that the majority of stocks, from U.S. and international stocks to natural resources stocks, are underweight and can be added to your portfolio for less. Edelman puts the point more simply: "Stocks are going on sale."

 

Bonds

After the news of the downgrade, many people questioned the impact it would have on U.S. Treasury bonds, but apparently the bond market never got the memo that it was supposed to be in trouble.

 

"Ten-year Treasurys, the common thing you'd think investors would be selling off today, are rallying unbelievably," says Fran Kinniry, a principal of Vanguard's Investment Strategy Group. "I would never recommend people get out of Treasurys if that's what they already own."

 

As for other bonds, Edelman suggests avoiding long-term bonds and focusing more on those with a short-term maturity of five to seven years, noting concerns that there could be other credit downgrades and a rise in interest rates.

 

Gold

Don't jump for gold just yet. It may be at record levels, but that's all the more reason to play it cool.

 

"Gold is experiencing a bubble," Edelman says. "It may run up a little more, but when it bursts, it will crater way down."

 

That doesn't mean stay away from it entirely -- it should be part of any diversified portfolio -- but now may be the wrong time to bet it all on the gold rally to continue, advisers say.

 

When to worry

"Most people that we see are reacting to yesterday's news -- or in this case Friday's news -- when what you should really think about is forward looking," Vanguard's Kinniry says.

 

Ultimately, the financial planners point to two signs that would show turbulent times are on the horizon. The first, according to Kinniry, would be skyrocketing interest rates, which would indicate that the market believed the U.S. to be a riskier investment. The other key sign would be a sharp decline in corporate profits, which would preface a major decline in the stock market, but Edelman says early reports show that's not happening anytime soon.

 

"Investors have taken their eye off the ball and focused on political theater," Edelman says. "Stocks are based on corporate profits, and when they remember that things will get better. This (down market) will be short-lived."

13Comments
Aug 9, 2011 1:43PM
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I was too cowardly to buy in 2009 and I paid for it.  Not this time.  I'm buying.
Aug 9, 2011 1:55PM
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OMG! Imagine that! Financial planners telling people to keep their money in their hands so they can continue to rake in fees and commissions? Who would have ever thought???

Aug 9, 2011 2:27PM
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James,

You have to buy in phases during downturns.  You never really know (and neither do the experts) how low it will go.  For instance, I only picked up 5 shares of each mentioned in my post below.  If the market drops another 5%, I'll pick up another 5, and so on.  You don't want to make a big buy at once, otherwise you risk losing in the short and have to hold long in order to break even or make money.

Aug 9, 2011 2:23PM
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It is easy to say that this market downfall is/will be short-lived when one has money to lose and to take a long-term approach. Losing 15% virtually overnight, in my mind, is something to be concerned about. I have friends who lost significant amounts back in 2008. People told them the same thing - take a long-term approach. Nearly 3 years later they are just now getting back to their 2008 level, only now, they have lost significant monies - AGAIN! They are not getting ahead. They can't even tread water.
Aug 9, 2011 1:54PM
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I'm with you, AG999.  I knew '09 was the buying opportunity of a lifetime, but I was too worried about losing my job.  I picked up a couple of blue chips yesterday (COP, T, ORCL, and FCX).  I'm hoping for more investor panic over the next couple of weeks so I can pick up some more!
Aug 9, 2011 3:24PM
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The worst thing for your portfolio is to sell now with these losses.. especially if you are not going to retire for the foreseeable future.. in fact.. if you had a systematic investment where you invested only $50 a month into a mutual fund, you can take advantage of these dips...I started contributing monthly by cutting out the excess like going out to restaurants.. I would simply cook for myself 5 days a week and then eat out the other two days.. then I would take the money I saved and invest it monthly..The only problem was that i didn't know how to cook!  Then my girlfriend bought me a hilarious beginners cookbook that was a bit unpc so I won't tell you the name of it here.. but if you have a good sense of humor and don't get offended easily.. google "whipped and beaten culinary works"  to find it.. but seriously.. don't go if you can't take a good joke!

Aug 9, 2011 4:47PM
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I like what I am reading on this post...reasoned, logical and meaningful advice based on experience, pragmatism, empirical data and trend analysis.  It has been said repeatedly by the experts that fear and greed drive the market and it has also been said that no trend lasts forever and finally a very savvy "Investor" once told me that if you try to figure out the market it will figure you out. The Author of this article Mr. Seth Fiegerman, hit the nail on the head with precision and blunt force when he noted that skyrocketing interest rates and an absence of corporate profits or credit to debt ratios in large favor of debt were legitimate reasons to worry.  When looking at the fundamentals of battered blue chip stocks, mid caps and small caps alike there is a cornucopia of value stocks with unbelievably STRONG fundamentals littering the market. I can't even begin to list them fast enough or buy them fast enough but when you see companies with positive growth and income operating in the green with betas below 1 and credit to debt ratios below 1 with stock piles of cash and many that pay dividends as well...AND you are an "Investor" you are in Eden my friends.  Also, this is going to sound a bit jaded at first but I am elated that the market dropped another 600 points yesterday because I firmly believe that after the market was already oversold and undervalued the last panic sell nearly purged the market of fickle day traders, margin account traders, speculators and the like creating a more stable investing environment for us all.  There were simply too many traders focused on too many things that do not accurately measure a corporation's true worth or risk and/or what truly impacts the market and that resulted in exactly what we saw the past 2 weeks. Case in point...look at the loss of our AAA credit rating, who even knew the far reaching effects of that entity or process, better yet I wonder how many of the panicked sellers knew or currently know what it is intended to do by the direction of the Fed Chairman.  For those of us who have done our homework we know that the purpose of CRAs was to enhance the transparency process for corporate earnings and risk so that investors would know before the disaster hit ground zero (i.e., Enron) that they needed to sell or be left with nothing.  Furthermore, we know that the CRAs are influenced and marginally (if not more) corrupt as their existence and utilization is derived from the Fed so WHY are we even paying attention or giving strong consideration to their ratings before we compare the metrics used and the statistical method or approach used to calculate and justify their ratings?  Two other CRAs (Fitch and Moody's) put forth that our rating should remain AAA and Moody's is allegedly the most equitable and unbiased agency we use.  The bottom line is that we as investors should stay focused on the fundamentals and stay consistent with our approach...that's why I will continue to buy snow shovels (undervalued, oversold strong stocks) in June while others will buy overpriced, overvalued lawnmowers (Gold) in June which, by the way will eventually become the next cyclical bubble that we will see explode just like the tech bubble, the financial bubble and the sub-prime bubbles of our recent past.  Best of luck to you all!                 

Aug 9, 2011 6:43PM
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The average investor can't afford gold and must turn to bonds. The world debt is coming to roost. and will continue to turn the markets down a rough road for the near future. The Fed can't do anything or they would look weak to the world markets so they must sit back and let the world  markets adjust.

Aug 9, 2011 4:03PM
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Mister Manners is dead on the money- the ONLY winners are the Wall Street titans who get paid no matter what and--hint- control order flows, preferences for trades, insider information, etc. It's become 1 gigantic casino, and the retail investor is the chump.
Aug 9, 2011 10:07PM
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Gil 263...You may be right about gold but my disciplined approach won't allow me to purchase anything, including precious metals at historic highs.  Also, I do believe I am correct with stating that gold is overvalued and oversold at current levels.  However, when people are motivated by fear, logic and reason go by the wayside.  In closing, I am strongly considering the fact that you have invested in gold since 2007 so that assuredly does not make you a trend following, bandwagon style investor.  Continue to dollar cost average in your investment and please know that my position is based on current conditions and investors (using the term loosely) dumping their securities after taking huge losses in exchange for gold after an unprecedented week of panic selling.

 

very respectfully,

MM      

Aug 9, 2011 5:56PM
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This person along with others are wrong about gold. I started buying physical gold heavily since 2007 when gold was 650 an ounce and just stop buying when gold was 1525. I believe gold will have a 15% pullback but will always go up for years to come. If the market improves around the world gold will pull back but continue up because of growth in china and india for gold jewerly.
Aug 9, 2011 3:17PM
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@ Brian_2273 I'm a first year grad student and new at the stock market and I am trying to buy in and from all the research I've been doing this will probably be the best time to buy in, being that a lot of stocks are dropping... you seem knowledgeable, so can you email me at  so i can ask you a few questions.... If you have the time, I would greatly appreciate it. 

 

Email: parksr3 @ student . lasalle . edu 

 

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