The latest round of headlines includes such doomsday catch-phrases as, “the economy is at DEFCON 3” (thanks, HuffPost). Tabloid reporting aside, we understand these kinds of soundbites don’t help frayed nerves over the impending debt crisis.
The fiscal brouhaha in Washington is real—there is no doubt that economic implications are there—but it’s not an occasion to do something rash. We’ve been through this before (remember last year? or the year before?), and likely will go through it again. Investing is a journey—and every low in market history has ultimately been made up given enough time in the market.
Facts before feelings
1. Know the real issue: It’s important to remember this is not a case of the United States not being able to pay its debts, or raise new money. This is completely a game of chicken played out in political theatre, and over disagreements in policy. The U.S. is not bankrupt, nor is it borrowing at high costs, quite the contrary. So this ‘problem’ will be resolved quickly and cleanly once one side cracks (or a compromise is found). That’s a setup for quite a quick uptick when it happens, if there has been a downtick (so far minimal) because of it.
2. What is the market saying? If bond traders and investors, including overseas governments and corporations, were really worried about the U.S. not repaying its debts, you would see a big rise in treasury yields. In fact, U.S. Treasuries are still being sold at auction at record lows. Investors are willing to lend the government $100 to get only $100.28 in return after a year. The people who trade in these securities all day, whose full time job it is to price them, are acting pretty blasé.
3. Know your exposure: How much money do you actually have in U.S. bonds? Most Betterment customers have portfolios between 70% and 90% stocks, meaning their bond exposure is pretty low. And our internationally diversified equity basket can keep ticking up in the face of U.S. bond market troubles. Do you really want to be market-timing a minority share of your portfolio?
4. Dividends, baby: Did you know you just got paid dividends? Selling out doesn’t mean missing out on just potential price gains, it means missing out on potential dividends too.
5. Taxes, always think about taxes: Selling, especially when we’ve had such a gangbuster year, will probably mean your return (BMT 80% stock portfolio is up 11.7% YTD) is taxed at the highest rate right now, so you don’t want to sell.
6. Fear/Greed: What’s that slogan about buying high and selling low? Be greedy when others are fearful, and fearful when others are greedy. Media outlets are generating a lot of fear. Now how are you going to respond to it?
The bottom line is this: If you act upon the noise coming out of Washington, and propagated by news outlets, you’ll probably end up selling low, paying taxes, missing out on dividends, re-buying after the uptick in any resolution—all to avoid a very short-term and not especially deep pothole on your investment journey.
That’s precisely why most investors underperform. Instead, we hold to our philosophy that a do-nothing strategy is the best one to deploy at times like this.