Betterment: Dealing with the budget showdown
We’re going to press at a volatile time—at least as far as Washington is concerned. As you read this, we may be facing a government shutdown. On top of which there’s the fight over the debt ceiling in a couple of weeks.
Putting aside the sinkhole of partisan politics, what does this mean for your money?
The most important thing for you—financially and emotionally— is to avoid strong reactions and sudden moves that could compromise your portfolio, your financial plans, or (worse) lock in losses. In fact, the smartest thing you can do for the next few weeks is to sit tight, and try not to get drawn into all the drama.
Dial back on news
In the past week, you’ve probably been exposed to a lot of opinions like this, from an article in Politico: “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.
S&P 500, Sept. 2011 to Sept. 2013
News is written to sell, and fear sells. Your job as a long-term investor is to not buy it. Plus, 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.
Understand the circus
As an aid to your sanity, it may help understand the three-ring circus that’s unfolding as we speak. The pitched battle over Obamacare is the real fight here. The bill that was passed by House Republicans last 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. As we go to press, it’s looking like the budget might not pass by the pass by the October 1 deadline, resulting in a widespread shuttering of government offices. That 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.
Just 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.
Stay calm, and 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.
Got money questions?
Hit us up at firstname.lastname@example.org. Betterment is a leading online investing company that delivers smart, personalized financial advice paired with low fees and a superb customer experience.
Jon Stein is the founder and CEO of Betterment.