We’ve got the government on the brink of shutting down tonight at midnight, if Congress can’t agree on a budget. And we’re facing a looming battle over the debt ceiling in the coming weeks.
Putting aside the sinkhole of partisan politics, what does this mean for your money?
One thing you can count on: We’re heading into a volatile period—at least in Washington—and it’s tough to predict how long it will last. The most important thing for you is to avoid strong reactions and sudden moves that could make your portfolio vulnerable to downside risk, or (worse) lock in losses.
Your personal financial outcome, as the economic storm rises, depends on you: what you read, what you believe, and ultimately how you behave regarding your investments for the foreseeable future. Here, a survival guide for smart investors:
Dial back on news
In the past week, you’ve probably been exposed to a lot of opinions like this, from an analysis in Politico today: “If [the shutdown] goes three or four weeks or longer, then you do serious damage to the economy, triggering a recession and destroying consumer confidence in a way that could take years to rebuild.”
Brace yourself for a steady stream of dire predictions like this. But remember that they don’t necessarily reflect reality. Yes, the market pulled back during the so-called fiscal cliff of 2012 and the budget standoff of 2011 (remember those?), but it also recovered, as you can see right here.
More information doesn’t lead to better decisions. We tend to weight new information over old information, even if old information is objectively more important.
News is written to sell, and fear sells. Your job as a long-term investor is to not buy it. Rather than get stressed and make bad decisions, realize that this is political theatre, and is a hiccup in the big scheme of things.
Understand the circus
As an aid to your sanity, it may help to know what’s going on. The pitched battle over Obamacare is the real fight here. The bill that was passed by House Republicans this weekend would strip down key provisions of the healthcare law—but Democrats in the Senate have said they will stand firm to keep the law intact.
But as savvy investors know, this is politics, so you can expect a lot of brawling before either side will budge. Things might appear bleak if the budget doesn’t pass by the October 1 deadline (i.e. midnight tonight), resulting in a widespread shuttering of government offices. And it would be serious, especially for government workers, who would be furloughed). But a shutdown is relatively low-stakes compared to the October 17 deadline for raising the debt ceiling: i.e., the amount of debt or bonds the government can issue to meet cash flow needs.
Right now, in a last-ditch attempt to weaken Obama’s stance on the healthcare law, the Republican-controlled House seems poised to block the White House’s effort to raise the debt ceiling. But bear in mind, no matter how hysterical the headlines may get the last thing anyone really wants, on either side of the aisle, is to jeopardize the economic recovery by raising the specter of the U.S. defaulting on its debts.
Take your cue from the standoffs of the last couple of years—which took up weeks of air time and screen time—for nothing, ultimately.