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Debt ceiling: What you should do now

Jul 29, 2011 | | Comments Comments Off

A default is not Armaggedon.

We in the media need to make that clear. We’ve been excoriating Congressional bungling and inaction so loudly that many ordinary people are getting the impression the world is about to end.

It’s not. A default would have some seriously bad affects—including raising the interest rates on the national debt that everyone professes to care so much about. One of the basics of money management is that if you’re in debt, you want to keep your interest rates as low as possible to get out of debt faster. Doing something that makes your interest rates rise is just stupid. But right now, “stupid” is Congress’ middle name.

So what can you do with your own money to prepare in case we do default? My thoughts:

Move your cash from money markets to FDIC-insured bank accounts. The average interest rate on money market mutual funds is .25%, and they aren’t federally insured. The risk that money funds would “break the buck” and lose principle is probably minimal, but you’re not being compensated for taking any risk, so you’d be better off in an online bank account paying 1% or so.

Don’t invest in gold. Gold is a hugely speculative investment. The gold bubble has been growing for years, and the last time this happened the crash was pretty awful. In fact, the price of gold still hasn’t climbed back to its previous 1980 peak in inflation-adjusted terms. Buying gold or gold mining shares right now is gambling, not investing.

Make sure you’re diversified. Bailing out of the stock market isn’t a good choice. Congress will get its act together eventually. If it doesn’t do so before the default, it will do so quickly afterward, once the stock market plunges. Either way, if you’re out of the market you’ll miss the relief rally. In any case, trying to time the market is all but impossible. If you’re invested in a broadly-diversified mix of stock and bond mutual funds, you should be able to hang on for the bumpy ride. (One way to get quickly diversified is to put your money into a “lifestyle” or “target date” fund, that does all the diversification and rebalancing for you. Most workplace retirement plans and brokerages offer these.) But remember that money you’ll need within five years should be in a safe, easily accessible bank account, not invested in the stock market. That’s true under any market conditions, but if you’ve been taking chances you shouldn’t, now is the time to correct that.

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