(Update) Wes Moss: What you should do while waiting out debt crisis

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

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Last night the White House and congressional leaders told the world a deal had been reached. However, that deal still needs to be approved by both the House and the Senate today.

Markets initially rallied on the news, but by mid-morning the gains had been wiped away — the market’s way of saying, “the deal isn’t done until it’s done.”

So as the clock still ticks toward the deadline for Congress to raise the government’s debt ceiling, investors at every income level and life stage are asking what they should do to protect themselves if negotiations don’t work out.

I’ll address some of those questions. But first, it’s important to clarify some terminology. Despite today’s tentative agreement, a failure to increase the debt limit by tomorrow would still not result in a sudden financial default by the U.S. government. The government has plenty of money to keep paying the interest on its current debt. Other budget items like federal salaries, HUD programs, Department of Energy, etc. could experience delayed payments if the debt ceiling isn’t raised.

But even if today’s deal does go though, our government’s AAA credit rating is at risk of being downgraded.

To put all this in personal finance terms: missing the deadline would hurt our credit score and possibly boost our cost to borrow long-term money (think a 30-year mortgage), but it won’t immediately put us in default on the current mortgage or force us into bankruptcy.

With that in mind, here are some answers to popular questions I’ve been getting.

Should I just sell everything and wait this out? That certainly seems like a logical approach. Why not head for a safe harbor until the storm passes? While I don’t recommend this strategy, you need to be comfortable with your investment decisions. If you are literally having trouble sleeping because of concerns about your investments, then yes, cash out.

Some things to consider before you get out of the market:

  • Remember the difference between temporary and permanent. Yes, we’re on a roller coaster ride. But every ride ends. It is very difficult to time your investment decisions to external events. The most common result of jumping out of the market to avoid turmoil is that you miss the opportunity to score significant gains. Think about blue chip companies like Proctor & Gamble, McDonald’s and Coca-Cola. Do you really think these companies are going away because of the government’s debt crisis?
  • If the “full faith and credit of the United States” is compromised, where will your money be truly safe? A money market fund? An FDIC-insured bank account? Just about any “safe” investment could feel the ripple from an actual default. However, a downgrade from AAA to AA for the U.S. should have almost no impact on money market funds or “cash.”

Should I sell my stocks and buy bonds? Again, while this makes sense on the surface, the bond market is not a guaranteed safe haven. In the event of a default, almost every type of bond would become less valuable as interest rates would start to rise. But again, we aren’t looking at default as an option.

By the way, if you’re thinking of selling your U.S. Treasury bonds, ask yourself where your money will be safer. If Treasury bonds take a tumble, all government bonds — state, municipal, foreign – will drop along with them.

Should I get into gold? Gold shines brightest in crisis. The fear and uncertainty of the past few years have driven it to new heights. But remember, when things calm down, the bottom could drop right out of the price of gold just as quickly as any other investment. I believe that owning 5 to 10 percent in gold — preferably a gold ETF — is fine as part of a balanced portfolio. But I can’t with good conscience recommend jumping into the shiny stuff with both feet right now.

Should I buy a house before interest rates go up? If you have done your due diligence and are ready to buy a home you plan to own for at least five years –- yes, do it. A downgrade of the government’s credit rating will almost certainly result in increased mortgage rates.

But there is no need to rush out and grab the first house that kinda, sorta meets your needs. Remember, if mortgage rates go up, house prices will fall. So take your time. It’s going to be a buyers’ market for some time yet, even if mortgages get more expensive.

How will this affect my trip to Europe? The debt crisis is likely to continue to weaken the dollar against other currencies. That slide, which has been going on for some time, shows no sign of ending. So if you are planning an overseas trip, go as soon as possible –- and be prepared for a shock every time you do a currency exchange.

Also: Want to talk even more about investing? Check out the Biz Beat blog.

– By Wes Moss, for Atlanta Bargain Hunter

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10 comments Add your comment

[...] Atlanta Journal Constitution (blog) [...]

DW

August 1st, 2011
11:10 am

“Markets initially rallied on the news, but by mid-morning the gains had been wiped away — the market’s way of saying, “the deal isn’t done until it’s done.”

I thought it had to do with the manufacturing report showing BARELY any growth… 50 and change.

Steve

August 1st, 2011
12:27 pm

Cutting spending with no revenue is a half-baked solution, and the timing couldn’t be worse when we need to be stimulating the economy to create jobs. This is only going to push us back into recession. Thanks – TeaParty extremists who have no clue about economics.

GeoffDawg

August 1st, 2011
12:32 pm

I think Steve is the one with no clue about economics. Government doesn’t create jobs nearly as efficiently as the private sector lame-brain. And just call it what it is – additional revenue is political speech for higher taxes. That’s what hampers job creation. Have you ever even been inside an econ class?

DW

August 1st, 2011
1:07 pm

So if tax rates are at multi-decade lows, how come new jobs are being churned out left and right?

answer: DEMAND is what creates jobs, NOT tax rates

DW

August 1st, 2011
1:08 pm

[...] Financial Planner Wes Moss offers his perspective on the Atlanta Bargain Hunter [...]

GeoffDawg

August 1st, 2011
2:39 pm

Exactly DW – you make my point for me. It’s simple supply and demand at the bottom of it all. Demand for workers due to private investment and growth is the biggest spur to job creation. Thanks for agreeing with me.

BTW – What was the cost per job of that stimulus package? Really efficient use of resources there, huh?

Also, if there’s one thing investors hate – it’s instability in the government. When you have a president that takes over a sixth of the economy and feels free to fire presidents of corporations, guess what – people who are trying to earn a return on the risk they’re taking with their money don’t like that. Shocking, I know.

GeoffDawg

August 1st, 2011
2:52 pm

Obama tripling what was already a monstrous deficit under Bush doesn’t help calm the economic waters in this country either. This is withoug a doubt, the most anti-private sector administration we’ve ever had. Absolutely no real world business experience but he has the gall to lecture us about “eating our peas.” What in his experience in as a “community organizer” qualifies for this?

If the country has questions on “feelings”, by all means, let a liberal handle it. Leave business to fiscal conservatives.

To GeoffDawg

August 3rd, 2011
7:52 am

Econ? What is that?

Steve