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?
Make 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