It’s portfolio damage control time again. Things are not going well for the Congressional “Supercommittee” that is working on “do or die” deficit reduction ideas. We are less than a month away from their deadline. Based on present information, you should assume that the committee will fail and prepare your portfolio for a significant downturn in the market.
The committee must present a deficit reduction plan for an up or down vote by November 23. Rumor has it that the committee is hopelessly deadlocked – again – over revenue increases vs. spending cuts. If the committee fails to reach an agreement, $1.2 trillion in spending cuts will be automatically triggered. The failure to agree would be the first blow to market conditions.
But it probably won’t end there. If the committee fails (likely), there will be attempts to undo the original deal to prevent the automatic spending cuts from being triggered. This will unwind everything and put us right back where we were at the first crisis point, minus the debt ceiling problem. A second consequence could be a further downgrade of the U.S. credit rating, delivering a second blow to the market.
I don’t care which party you support – Democrats, Republicans, Tea Party – whatever. This will not be good for your retirement portfolio. Sadly, there are some members of Congress who are willing to knowingly punish the market (and our portfolios) if it would reduce the chances for an Obama re-election. At this point in my retirement planning, I care less about elections than I do about planning for and affording my future.
So what should you do? These are my thoughts (and what I do):
1. Triple-check your asset allocations to make sure you have some non-correlated investments that will likely go up if the committee fails and the markets head south, as expected.
2. Do the same with your 401(k) investment elections.
3. For your stock and ETF holdings, put in some stop loss orders that will trigger and minimize your losses if something dramatic happens. It wouldn’t be a bad idea to consider trailing stop loss orders to lock in any gains between now and the committee deadline.
If you don’t have the time or confidence to do anything on your own, call a trusted, fee-only financial advisor. Tell him or her you want to protect your retirement portfolio against the negative consequences of supercommittee failure. Get some specific advice that makes sense. Then follow that advice.
Here is a good discussion of the current state of affairs in the supercommittee: U.S. Supercommittee Flirts With Failure.