Q: We are seriously concerned about the dysfunction in Washington and its future impact on the financial markets. Please tell me how we can alleviate these fears. What kind of moves can we make and rates can we achieve by going more conservative to protect our assets?
A: Many people share your concerns. The political dysfunction is dismaying. Every day we see evidence that Washington is sinking deeper into acrimony while problems fester and reasonable solutions are shelved.
What are the implications of political fault lines for managing our personal finances? With the space constraints of a column I want to emphasize two points. First, on the general level of investing for the long-haul, you can’t get rid of the uncertainty.
Think back to the Great Recession, the 2000 to 2002 bear market, the 1987 stock market crash, the 1970s inflation, and so on.
When I look at a chart of long-term stock market performance the line shows a relatively smooth upward slope (the exception is the 1929 crash). The closer you get to the data the more the zigs and zags dominate. Here I agree with Warren Buffett, the head of Berkshire Hathaway, in his latest letter to shareholders:
“American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that,” he writes. There will be scary periods with major downturns, he adds. His personal finance insight from his optimism is that “personal fear is your enemy. It will also be unwarranted.”
That said, on the level of your individual household portfolio why not reduce its overall risk and relieve some stress? Reducing your exposure to equities and making sure your portfolio is low-fee, well-diversified and in high-quality investments is a risk-reducing tactic.
You might also consider the “bucket strategy.”
One bucket holds enough safe savings to pay for two to three years of necessary expenses. Safe savings are held in bank accounts, online savings account, U.S. Treasury bills and the like. This money will be spent.
The other bucket holds your riskier investments like stocks and bonds that might earn a higher return.
This approach is psychologically and emotionally reassuring. You have set aside enough in safe savings to tide you through tough times and maintain your standard of living.
Chris Farrell is senior economics contributor, “Marketplace,” economics commentator, Minnesota Public Radio.