In just over two years, we have endured the 2011 debt ceiling fight, which shaved over 2,000 points off the Dow Jones Industrial Average and the December 2012 “fiscal cliff” fiasco, which further unnerved investors.
Americans are confronted with yet another bitter budget battle that threatens to undermine a still fragile economic recovery and inflict serious damage on our financial system.
As I write this article, the government shutdown is entering its ninth day with no signs of a resolution in sight. Unfortunately, due to furloughs and cutbacks in government services and social programs, many Americans have already been affected. The longer it continues, the greater the impact on the private sector and the more likely its effects will be felt by all of us.
Still, while the precise consequences of the shutdown are impossible to predict, most economists expect that the shutdown alone, unless allowed to continue for weeks, is unlikely to cause long-term damage to the economy.
The bigger worry for economists, policy experts and business leaders is the looming debt ceiling deadline. Although no one knows exactly how it will play out, most agree that if Congress fails to pass a debt ceiling increase before the Oct. 17 deadline, it would necessitate a large and immediate cut in government spending. This would deliver a damaging blow to the U.S. economy and financial markets and could result in a default on our debt.
Not surprisingly, this most recent game of brinkmanship in Washington has begun to take its toll on investor confidence. After a steady decline during the run-up to the shutdown, the Gallup’s Economic Confidence Index has plunged more in the last week since the start of the shutdown than it had since the collapse of Lehman Brothers in 2008, an event which has become synonymous with the worst financial crisis in over 80 years.
In other words, investors of all types are becoming increasingly alarmed that the gains they have seen in their investment accounts may begin to evaporate once again. This may particularly true of older investors, who recognize they have neither the time nor the stomach to endure another sharp downturn.
There’s no question investors have good reason to worry and as that worry mounts, so does the temptation to make major changes in their portfolios to avoid temporary losses. The likelihood, however, of timing these moves successfully is low.
First, both the outcome of the current political battle and the impact on the economy and financial markets are unknowable. Second, there is no evidence that even the smartest and most experienced investors can move in and out of the markets at the right time to profit from these kinds of events. Third, a well-designed investment portfolio should anticipate and benefit from these periods of economic stress that rational investors know with virtual certainty will occur and perhaps even with increasing frequency.
In just the last 40 years we have experienced over a dozen “crises,” including the 1970 oil embargo, followed by the savings and loan scandal of the 1980s and 1990s and the 2008 financial crisis. During that period, those investors who refused to panic during steep market declines or to be swept up in the excitement of a surging market, have been richly rewarded.
John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.