Debt ceiling ‘X-Day’ is coming. What should an investor do?

Debt ceiling X-Day is coming.

By some accounts, the day when the government runs out of money and can’t pay its bills – X-Date – is just weeks away and all kinds of economic hell will ensue. Markets will crash, recession will ignite, the dollar will falter, payments will be canceled, contracts delayed, interest rates will rise. And Congress and the president will continue to fiddle with debt ceiling talks while the economy burns.

But what does all this mean to you, the investor, the saver, the consumer? Is there anything you should be doing to cushion whatever economic blow might come your way from a government default?

While even the most pessimistic tend to believe Congress will ultimately raise the debt ceiling and life will go on as usual – this has happened, after all, 78 times now with little repercussions. Still, having a “whatif” strategy for one’s personal finances might not be a bad idea, some financial experts say, just in case. There could also be opportunity amidst the chaos.

In 2011, the debt ceiling showdown between President Obama and House Speaker John Boehner led to a 19% drop in the S&P 500 from May to October of that year, notes Thomas Samuelson, chief investment officer at Vineyard Global Advisors, in Englewood, Colorado.

“However, that sell-off proved to be a fantastic buying opportunity since the S&P 500 gained 33% over the next 12 months,” he said. “There was also a lesser debt ceiling showdown again in 2013 that caused the S&P 500 to fall 5% in October. That too provided a great buying opportunity since the S&P 500 was up 19.1% one year later.”

Debt ceiling X-Date advice: Cash is 'dry powder'

Samuelson said it would be prudent for investors to hold some extra cash and have some hedging in place - positions that go up when the market goes down – to take advantage of any volatility around this year’s debt ceiling showdown.

“Cash serves as “dry powder” that can be used to buy stocks with favorable longer-term fundamentals that get sold off in an overall market decline,” he said. “The hedge positions will have profits that can also be realized to buy stocks with attractive longer-term fundamentals.”

Diversification is a common word from investment managers when asked for X-Date strategies. Looking for ways to spread investments across various asset classes and sectors, they say, is frequently a good strategy at all times.

“Diversification can help reduce the risk of a single event significantly affecting your entire portfolio,” said Samuel Cohen, business consultant at EducationInvestor.

Cohen also recommends holding on to “safe-haven assets,” including gold, government bonds of countries with strong credit ratings, and other assets known for retaining or increasing value during market uncertainties.

Long-term perspective is 'essential'

“Although defaults may trigger short-term market volatility, the impact usually diminishes over time,” Cohen said. “As an individual investor, it's essential to maintain a long-term perspective and not let short-term market events dictate your strategy.”

Staying tuned in to current developments, updates, and financial news, is also part of a good strategy say some advisors.

“I recommend staying informed and monitoring the situation,” said Rhett Stubbendeck, chief executive officer at LeverageRx, a technology-focused personal insurance company focused on helping medical professionals with their finances. “Keeping up-to-date with news and analysis from reliable sources can provide valuable insights into market conditions and potential impacts.”

Also, like other consultants, Stubbendeck says investors should think long-term not just the short period that might seem volatile in the wake of potential debt defaults.

“Short-term market volatility is possible, but history has shown that economies and markets tend to recover over time,” he said. “Panic selling or making hasty investment decisions may not be beneficial in the long run. Consulting with a financial advisor or professional is also prudent.”

Some investment advisors lean toward esoteric, and sometimes risky, investments in the event of a government default, like purchasing call and put options.

Exact fallout 'hard to predict'

“It’s hard to predict the exact fallout,” said Asher Rogovy, chief investment officer at Magnifina, a New York-based investment advisor. “However, overexposed investors could consider hedging with put options on vulnerable stocks or indices.”

Another strategy, he said, is to buy call options on volatility-related instruments like Volatility Index Futures. But such strategies are not for the inexperienced or faint-hearted.

”As will all option trades,” he said, “spreads may reduce the cost or risk. But they are highly speculative trades and are not suitable for many investors."

André Disselkamp, co-founder of Insurancy, an InsureTech focused on managing business insurance and corporate pensions for startups, also believes in considering alternative investment vehicles, such as hedge funds, private equity, or real estate investment trusts that may provide both diversification and perhaps lower exposure to typical market risks.

“Maintain adequate liquidity in your portfolio to cover any potential short-term financial demands or to capitalize on investment opportunities that may occur amid market turbulence,” he said.

Some advisors recommend a “proactive defensive” investment strategy for turbulent times.

“Defensive sectors tend to exhibit more resilience,” said Bailey Schramm, finance advisor, for BizReport. “Industries such as utilities, consumer staples, and healthcare are considered defensive due to their relatively stable demand and essential nature. Investors should allocate a portion of their portfolio to these sectors to help mitigate potential downside risks.”

We’ve gone through this before and debt ceiling showdowns have come and gone, and there’s little reason to think this time will be different, most analysts say.

“The average investor should think longer-term around debt ceiling showdowns and stick with the asset allocation that is suited for their investment objectives,” says Vineyard Global Advisors Samuelson. “That means evaluating time horizons, risk tolerance and tax considerations.”

Nevertheless, there are fear mongers among us. A former economics professor responded to our query with a sky-is-falling warning.

“Take at least $5,000 cash out of your bank and make sure you have guns and ammunition,” he wrote. “If the debt ceiling is not raised for more than a few days, there will be absolute chaos as banks will be closed.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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