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Putting the Debt Ceiling in Perspective

As politicians play kick the can on US debt limit negotiations many people wonder if they should change their investments in anticipation of a potential US debt default. We think this piece from Dimensional Fund Advisors provides valuable perspective (mind-over-matter-perspective-for-investors-on-the-us-debt-ceiling.pdf

We would encourage investors to consider the following:

  • The equity premium accrues to investors willing to embrace short-term uncertainty.
  • Markets incorporate information in current prices. Investment graveyards are filled with people who tried to outguess the market.
  • If the US technically defaults on its debt its unclear what that would mean in practical terms.
  • Making a “temporary change” to one’s investment portfolio until the “dust settles” requires accepting two significant deviations from your long-term plan – either in duration (time) or degree (percentage).
    1. How much of a decline must occur before you go back in?
    2. If you guess incorrectly, how much appreciation are you willing to forgo?
    3. How long are you willing to wait?

There are always reasons to be fearful of what the markets may do. Our role as an advisor is to put such concerns in proper perspective.