ARBOR WEALTH: Debt ceiling debate and downside protection

Margaret R. McDowell
Special to The Log
Published: Thursday, October 10, 2013 at 15:25 PM.

“We got to make the break … 'Cause we got too much at stake.” — “We Ain’t Got Nothin’ Yet” by The Blues Magoos

The reaction of the markets to the government shutdown has been fascinating. The day prior to the shutdown saw the Dow Jones Industrial average fall some 0.84 percent. The day the shutdown occurred, though, the DJIA actually experienced a small uptick.  Futures were down at this writing, the day after the shutdown.

It’s possible that markets are becoming somewhat numb to the continuing inability of Congress to work harmoniously to solve the nation’s economic issues. They always seem to slap another patch on the country’s flat financial tire just in time, right?

Well, let’s hope so. Because the debt ceiling debate that looms over the next few days may prove far more influential and volatile to markets than the shutdown controversy.

The worst case scenario is that the debt ceiling debate cannot be resolved and the U.S. defaults on its payments. Some of the world’s most renowned economists fear that this could cause a global economic crisis. The U.S. is the world’s largest economy, and if we fail to pay our monthly bills, the world’s money chain would be broken, albeit temporarily. Let’s hope this doesn’t happen. We don’t think it will, but the rhetoric resonating on Capitol Hill during the government shutdown does give one pause.

What is more likely is that Congress will debate the debt ceiling issue ad nauseam and finally reach a last minute compromise that will allow the U.S. and global economies to continue functioning. Meanwhile, markets will suffer. How much is anyone’s guess. Other factors will influence stock prices while the debt ceiling debate occurs, but global markets may experience a significant downturn because of the political instability.

What’s an investor to do? Well, if you are nearing or in retirement, here’s where investing is not all about growth. If you are 25 or even 35, you should have plenty of time to overcome a significant slide in stock prices. Not so, though, for investors who are attempting to protect a hard-earned nest egg and don’t have a lifetime to recover. Folks who lost 37 percent of their assets in 2008 may now theoretically see their portfolios in complete recovery, but what about the lost five years in terms of time?



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