Preparing Your Money For A Debt Ceiling Default
Let me start this off by saying that I do not expect the US Government to default on its debt this summer. I’m not one to generate eyeballs from fear-mongering, but I do want to comment on what is at the top of many people’s minds right now. Thus far, the stock market has largely ignored the debt ceiling theatrics that typically occurs every few years in America. Is this the calm before the storm of the June 1 “X-Date” (the day we “run out of money”)? The closer we get to that date (which is arbitrary) without a deal, the more likely the market sells off at some point. Generally speaking, that would most likely represent a buying opportunity. Why? Think back to the last couple of presidential elections. How much anxiety was there in the days leading up to the election? Then look at what happened after a Republican (2016) and then Democrat (2020) was elected. The market soared both times. I tell people to check their political ideologies at the door when it comes to the stock market, however, half the people listen to that advice half the time on average.
Anyhow, the great Mike Tyson famously informed us that everyone has a plan until they get punched in the mouth. When it comes to investing, I would say it is a matter of when you get proverbially punched in the mouth - not if. This is precisely what would happen to a majority of Americans should the government actually default. There would be panic, selling, and a lot of uncertainty. But again, most estimates have the likelihood of an outright default between 2 and 10%. Regardless, I prefer to have a plan, and I will share the steps that I am taking just in case things get rough this summer.
Figure out how much money you want to have in the market today. My general advice is somewhere around 50%, more or less, for a long-term investor (7+ years). If you are in this for the long haul, you don’t want to sell all of your stocks every time you get anxious about the market. Why? Because history has shown that you’ll miss on much of the market upside. Extreme market anxiety is often followed by tremendous upside. Look at what the market did in April 2020 after Covid wreaked havoc on the market in March. People tell me all the time: I’ll wait until all this settles down and then get back in. They never do. By the time they get back in, the market is at or approaching all-time highs. And this is usually when you want to consider exiting the market - not getting in. I believe the next bull market breakout to new highs is around the corner: sometime this fall or maybe the first half of 2024. However, if you sit on the sidelines during times of uncertainty, it is quite possible that you miss everything. Everything could be resolved in the coming days and the market could make a big move upward. We just don’t know. You have to prepare for each possible scenario in advance.
Be prepared to take action when the $hit hits the fan. Let’s say things get dicey and the market sells off hard this summer. At some point, you have to be ready to get into the market if you’re a long-term investor. If you had half of your account balance in cash, a massive selloff would be the time to average down and take larger positions. Psychologically, the best time to buy is usually when you feel most uncomfortable about it. You have to buy when you expect the market to go lower. What are the key levels to watch and where is a good price to enter? That’s what people pay me for. Things change all the time. You have to be nimble and have good judgment in a fast-moving market. 2022 was a rough year for many investors, but we did okay. Recognize that the situation last month may change as new evidence and outcomes come to light. At the same time, don’t overreact. Got it? Clear as mud, I know.
Avoid money market funds that are not FDIC-insured. For the money that is in your brokerage account but not invested, it is “swept” into a “core” position. Many brokerage firms are presently paying over 4.5% on their core money market position which is outstanding. I have written over the past few months that money not in the market is still making money due to these higher rates. However, for the next couple of weeks, I do not think this 4.5% yield is worth the risk. I could write an entire blog about breaking the buck, but it has been written about extensively over the years, so you can research that on your own. Missing two weeks of interest in a money market fund equates to an opportunity cost of under .2%. Would I trade that for assurance that my money is safe? Absolutely. I can always get back into money market when the debt ceiling issue is resolved.
The reality is this: no one knows exactly what would happen in the event of a full-blown default. The safest place to be is the US Dollar and financial institutions backed by the FDIC (ironic given that it is the US that would be in default). You want to be in the biggest domestic banks possible. When it comes to your hard-earned money, don’t let your big bucks follow the buy local, mom-and-pop mantra. Just don’t. Save that for your groceries and clothes. Not your retirement.
Don’t listen to the media - and especially don’t listen to the doomsday charlatans. The last thing you ever want to do is panic. Before scenarios play out, make a plan for what you will do if X happens. Go through all possible outcomes. Don’t do anything irrational such as put all of your money in cryptocurrencies, gold/silver, or some other investment because someone said it was a great idea. You will lose more money making a poor investment decision than you will by taking no action in almost every scenario. You might see commodities like Gold, Oil, or Bitcoin soar after a market meltdown, but that doesn’t make it a good investment decision, even in hindsight. They could just as easily get trounced. For many novice investors that were too blind to see that their returns in 2021 were equatable to a lucky night at the casino, most all of them paid dearly in 2022 when reality set in. Sometimes it is better to be lucky than good and it takes a very self-aware person to realize that. Commodities are something experienced traders may speculate on, but I would not advise real investors to bother with them.
Have money put aside just in case. This should go without saying, but I will say it anyway. You need to have 3-6 months of your income saved up. It always blows my mind that over half of Americans are living paycheck to paycheck.
Here’s the silver lining to all of this. As we saw in 2020 during the pandemic lockdowns, most people would have been in a bind without help from the government. The reality is this, we are fortunate to live in the most powerful industrialized nation in world history. The US Dollar is the world reserve currency backed by the might of the military and taxing authority of the United States Government. You should always make a plan in advance for how to navigate turbulent times but don’t stress over the things you cannot control. If you haven’t noticed by now, there will always be something to worry about if you turn on the news. We will be okay no matter what happens.
