The clock is ticking for an agreement on the US debt ceiling. Here’s what financial advisors say you should know before a possible default occurs
Investors are watching closely as President Biden and Republican leader in Congress Kevin McCarthy continue negotiations to raise the government’s $31.4 trillion two-year debt ceiling and allow the federal government to default on the public debt impede. With an agreement yet to be reached, Treasury Secretary Janet Yellen is warning that June 5 will likely be the day when the US government will run out of money and be unable to pay its debts. Regardless of the outcome and potential market volatility, experts say investors can now take a few steps to ensure their own safety.
Over the past week, investors have taken steps to seek refuge in gold and bitcoin as the financial markets near the debt ceiling deadline. Further evidence of the volatility is this week’s performance in equity futures, which rose after earlier losses on hopes of progress in negotiations. Uncertainty aside, Julie Virta, a certified financial planner and principal financial advisor at Vanguard, says investors should still “stick to their investment goals and keep a long-term perspective.”
How should investors react?
Despite the mounting panic over what failed negotiations could mean for investors, Chris Lyman, a board-certified financial planner at Allied Financial Advisors in Newtown, Pennsylvania, recommends ignoring the noise and sticking to your long-term goals. “Personally, I wouldn’t take any proactive steps at this point to protect against an event that most likely won’t happen,” Lyman says, adding that even if it did, “it’s difficult to shield yourself from something like that protect, like so many do.” Financial markets and instruments are tied to US Treasuries.”
If there were any way to protect against a catastrophe as dire as a default, Lyman says adding exposure to international equities might be better protected. However, the federal government’s inability to reach an agreement is unprecedented territory and there is “no way to accurately predict the impact on other markets.”
That’s why Jason Siperstein, president and wealth advisor at Eliot Rose Wealth Management, based in West Warwick, Rhode Island, says his company doesn’t tell clients to do anything differently. “Markets surprise us all the time, and we should all know by now that market timing is a losing game,” says Siperstein. “Instead, investors should pay attention to how they are feeling amidst this volatility and uncertain political environment. If they don’t sleep at night, it’s a sign that their portfolio is probably too aggressive. And it is always better to reduce portfolio risk when the market is strong than when it is weak.”
Buffer your risk
A Bankrate report last month found that 68% of US adults would not be able to cover their expenses if they lost their job today, suggesting that most Americans are not good to one national economic downturn are immune. One in four went even further, saying they would be forced to book an unexpected $1,000 expense on a credit card and pay it off over time—and all without losing their job.
In a statement on the nature of the current debt ceiling negotiations, Vanguard warned, “The nature of this situation is increasing uncertainty in the economy and financial markets, which may lead to greater volatility in the short term.” When it comes to investors’ long-term plans, Virta says that this may be time to reassess their risk levels and put in place a safety net. (Check out the best savings rates you can get here.)
All in all, Virta says that anyone worried about their long-term financial health should first make sure their invested assets are secured “in a well-diversified portfolio” and have enough cash on hand to meet three to six months’ spending needs and plan for any unusual cash needs for the year.”
Consider hiring a professional
While most Americans think working with a financial advisor to help manage their money is a good thing, only a third actually do, according to a recent SmartAsset report. Not everyone needs one, but bouts of market volatility can prove stressful — as can a potential sovereign debt default. Therefore, having a professional on your side can be crucial. (Looking for a financial advisor? Use this tool to find an advisor that fits your needs.)
“A financial advisor can help an investor solidify their investment strategy and maintain their discipline over the long term,” says Virta, adding that they can also “work with you to set your goals and develop a plan to successfully achieve those goals. ” . In markets with downward pressure, costs are more important than ever; However, an advisor may be able to provide you with investment decisions, tax benefits and planning opportunities that are beyond their cost.”