Your American Debt Default Survival Guide

by Neal Frankle, CFP ®

Are you worried about the debt ceiling crisis and the looming U.S. default? Are you shaking about the prospects of what might happen to the investment world as we know it if these monumental problems aren’t solved? If so you aren’t alone. Truth be told, I’m a little skittish myself.

Let’s consider what we’re looking at. Will the government become a giant debt welcher? What might happen to the markets if our government defaults? What should you do now to safeguard your life savings?

First, I want to go on the record. I don’t think we will default on our debt – even if the debt ceiling isn’t raised. I could be wrong of course. And I’ve been wrong before.

It’s true that by Thursday, the Treasury will only have about $30 billion in the hopper. That might be a good sized emergency fund for you but D.C. spends more than $10 billion per day. So with only $30 billion left, the government will be running on fumes.

Still, the government can avoid bouncing checks starting Friday. Remember that the Treasury won’t stop collecting revenue and that alone will keep gas in the tank for another 5 business days. Unfortunately, the politicians know this.

In addition, the Treasury can sell assets such as gold and loans it holds. And remember that being President has its perks. President Obama has the power to declare a state of emergency. If he does that, he can order the Treasury to ignore the debt ceiling and pay debts. Last, debt agreements with contractors can be renegotiated.

What If This Doesn’t Work?

If all these tactics fail to work, there is the possibility of default but there is no saying how long that default might last. It could be a short-lived event or something that lasts longer.

If the default takes hold, the markets will probably crumble. But if the default lasts only a short time, the markets will likely recover quickly. That happened in the past but of course it’s no guarantee of what may occur in the future.  Look at what happened when the government shut down.  Many investors panicked yet the market has mostly yawned.

If a default endures, we’re looking at the possibility of some very ruffled feathers. Interest rates could climb, the economy could be thrown into recession and the market would probably get beat up pretty good. With that in mind, let’s talk about the best course of action for you now.

What me….worry?debt default

The situation is extremely fluid and volatile. I know every investing fiber in your body is telling you to pound that “sell” button. But hold off a second.

When there is lots of stress it’s hard to keep emotions out of the equation. But feelings and finance don’t play well together. Don’t let them in the sand box at the same time. Now isn’t the time to over-ride your investment strategy based on your gut. My advice is to stick with your strategy.

Even if you have a dynamic market-sensitive strategy, stick with it. Let objective data drive your decisions not your feelings.
Investors with a long-term horizon have lots of years to cycle through this by definition. The market weathered very rough seas in 2008 yet people who stuck with their investment approach did fine.

Of course, it could be different this time. Nobody knows. Are you/have you changed your investments because of the debt ceiling/government shutdown? Why or why not?  Please share your sense of this with me.

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