Thu, July 28, 2011
What Should Investors Do While Washington Fiddles over Debt?
Between the German Finance Minister announcing that the EU debt crisis isn't over and an ongoing debate over the likely market effects of a US credit downgrade, there’s a good deal of chafing at the bit on the question of what investors should do in the face of a troubling degree of market uncertainty.
Over at the Alephblog, my friend David Merkel has written an interesting post discussing the extent to which different types of investments might be expected to preserve buying power if the US Treasury market falls apart. The bottom line: diversify, don’t assume that any asset class is iron-clad, and don’t make changes on the basis of panic.
David notes that a default (which seems improbable, but nothing’s impossible) could trigger deflation, a bullet that most people thought we’d dodged.
If your portfolio is already reasonably well-positioned, doing nothing could be in your best interest. But maintaining liquidity and safety with any money that you expect to need in the next 2-4 years is undoubtedly the best strategy to follow until the smoke clears in the District of Columbia. At best, that would mean FDIC-insured accounts earning 1% or so.