Wes Moss: How to defend your portfolio from defaults

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.


With countries from Greece to the United States struggling with massive national debt, we’re hearing that disconcerting word on a daily basis. Should you, as a small investor, be concerned? And how should you respond to the threat of governments going broke?

Wes-Moss-032011-USE-THIS-VERSIONMake no mistake: A country defaulting on its debt could have an effect on your savings and investment portfolios. If Greece, for example, were to default, it would not likely have a large, direct effect on the earnings of blue chip corporations like Southern Company or Home Depot. But there could be negative indirect impact on the prices of such stocks.

A default could weaken the European banks holding Greek debt, prompting them to reduce their lending, thereby hurting economies worldwide. As we have seen the last 10 years, U.S. stocks are affected by the buying habits of foreign consumers as well as those of U.S. shoppers.

If America were to default because Congress fails to raise the debt ceiling, the impact would be more direct. Bond prices might fall because of a credit rating downgrade, the dollar may suffer and stocks would take a hit from a loss in relative economic strength.

How should you allocate your 401(k)s or diversify your investments in the face of these pending risks? Should you own gold? Silver? Foreign stocks? U.S. stocks? Real estate? Japanese yen?

Yes — own all of it. Diversification is always wise, especially in times of crazy uncertainty and upheaval.

Are you sure the United States will default? No. Are you certain we will see significant inflation the next six months? No. It is foolish to manage your portfolio based on events that might-could happen.

Instead, manage your assets based on your personal situation, taking into account your time horizon, risk tolerance, return expectations and long-term goals. While the investment market can exhibit wild volatility on a daily or short-term basis, those who are constantly shifting their assets in an effort to avoid downdrafts run the risk of missing exceptional gains.

A Morningstar study determined that if you had invested $1 in S&P 500 stocks at the start of 1991, and kept it in the market, it would have grown to $5.75 by year-end 2010. But if you missed just the 50 best days of those 20 years, your investment would be worth 97.3 cents.

Rather than trying to time the market in the face of uncertainty, you are better served to live by the slogan designed to maintain British morale during World War II’s darkest days: “Keep calm and carry on.”

– By Wes Moss, for Atlanta Bargain Hunter

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One comment Add your comment


July 11th, 2011
10:45 am

Ron Paul has correctly pointed out that ever since the Federal Government went off the gold standard in 1973 it has technically been defaulting on every single one of its debt obligations. If you are printing money out of thin air to pay your debts, you are cheating everyone you owe money to. That is criminal behavior, but our government and every other government with a fiat money system is doing it. Raising the debt ceiling absolutely means that the government will be stealing more money from everyone holding dollars through inflation. That we will be sending money to our creditors means nothing. We are still cheating them, stealing from others, and destroying the value of the dollar that the US citizens are FORCED to use as money.

Ultimately every country on earth seems poised to default on its loans. They are all spending more than they steal from their citizens, are all printing money out of thin air (or benefitting from the EU which is doing the same), and are ultimately building a rapidly growing unstable house of cards.

The only sound solution is to return to a sound currency that the market chooses. Likely this would be gold or silver, but ultimately something that the criminals that infest all of the world’s capital cities cannot expand the quantity of by means of a printing press. The global elites have gotten too wealthy for too long off the productivity of the worlds productive citizens and this will ultimately come to an end, one way or the other. The laws of economics cannot be repealed by majority vote.