The most discussed topic in financial markets currently is, as we all are aware, the government shutdown and the potential for a default on upcoming payments the government is obligated to make. The question has arisen from a few clients of what steps should be taken in light of these circumstances? Perhaps the most important response we can give you is that this is gut-check time for your asset allocation. Investors are in a situation of “unknowns.” (There are always “unknowns” in investing; they just seem more acute right now.) We happen to think, along with most strategists, investors, et al., that the actual probability of a default is pretty close to zero. It’s not zero, but it’s close. In the meantime, while Washington hopefully gets its act together, stocks have moved downward a bit. Recognize however, that the stock market is still up about 16% at this writing – well above an annual average.
For most clients, we currently have more cash, and hence are less invested, than we have been in a long time. This has been a conscious effort as lately we have found stocks to be expensive and interesting ideas few and far between. A stock market correction, usually defined as a 10% pullback, could conceivably change that dynamic and provide opportunities to put money to work. For those clients with government/agency bonds in their portfolios, we sleep pretty well – you’ll get your money back at maturity (or a bit later if a bond matured during a default).
If an investor’s anxiety is overwhelming given these events, it’s probably a sign that their risk tolerance is not as high as they think, and we should perhaps have a discussion about that. Dramatic tactical shifts are rarely the correct answer; long-term asset allocation and adhering to your financial plan is.