Don’t let Another Debt Ceiling Dispute Box in your Portfolio

With the threat of hitting the debt ceiling looming at the end of the month, government leaders were able to strike a deal. The debt ceiling is the self-imposed legislative limit on the amount of national debt that can be issued by the Treasury and thus restricts how much the federal government can borrow. Treasury Secretary Mnuchin estimated that the government would be able to meet its obligations until late September before defaulting on its obligations. However, the agreement reached was just a three month extension, so this issue will resurface in December; no doubt leading to another protracted battle.

We have been down this road before. Political brinkmanship between the different factions in congress and the administration will no doubt bring increased volatility in the stock market In December. However, we don’t think it would be time to run for the exits. As we have seen with the 2011 and 2013 debt ceiling fights moving a portfolio to cash would of had a negative impact.

In both of those previous instances bonds performed well, showing that in times of uneasiness US government debt remains the ultimate safe haven. The yield on the 10 year Treasury bond has steadily fallen since early July. If there was significant fear that the US would default and not make its debt payments the yield would be rising significantly to compensate investors for holding the bonds.

In portfolio construction, RWM believes the fixed income side of the portfolio should provide stability and capital preservation, while the equity side of the portfolio purses growth.  When volatility spikes on the equity side the fixed income allocation will be there to provide support.

While it certainly can be difficult to remain disciplined to your investment allocation reading the incendiary headlines about the debt ceiling, history has shown those who stay committed to a sound investment allocation are the ones who are likely to realize their long-term investment goals.

 

Index Performance August YTD Trl 1 Yr
US Stock (Russell 3000) 0.19% 11.20% 16.06%
Foreign Stock (FTSE AW ex US) 0.50% 18.80% 19.15%
Total US Bond Mkt. (BarCap Aggregate) 0.90% 3.64% 0.49%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.35% 1.43% 0.45%
Municipal Bonds (BarCap 1-10yr Muni) 0.56% 4.25% 1.22%
Cash (ML 3Month T-Bill) 0.09% 0.48% 0.62%

 

About

Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at www.raffawealth.com

 

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results.  You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC.  This information was gathered from reliable sources but we cannot guarantee accuracy.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.

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