Monday, July 18, 2011

Investing | What to do as the debt debate burns - Louisville Courier-Journal

You're walking across the street, minding your own business, when you look up and see a truck bearing down on you. Suddenly, you realize there's a good chance it won't stop. What do you do?

Investors are getting a similar feeling of impending doom as the deadline for Congress to raise the debt limit approaches.

The overwhelming likelihood is that Congress will eventually act and the U.S. government won't default. Until it does, you can expect increasing volatility in the markets. If you're tired of the roller coaster, consider moving some ? not all ? of your portfolio into short-term money-market securities or bank accounts. You should have enough cash available for your short-term living expenses, anyway.

Can you hedge against default?

?Probably not,? says Harold Evensky, a financial planner in Coral Gables, Fla. ?There are so many potential consequences. Even if you buried it in the back yard, you'd have problems if inflation went through the roof.?

So what's an investor to do?

The traditional cure for the roller-coaster ride in the stock market is diversification: bonds, both corporate and international, as well as money market securities, or cash. And some investments might even do well as the markets get jumpy:

Invest in volatility. Several exchange traded funds base their prices on movements on the Chicago Board Options Exchange Volatility Index, known as the VIX.

Invest in the bears. You can also buy ETFs that rise when the stock market or bond market falls.

Invest in gold. Gold isn't cheap and has been on a 10-year bull market run. But as fears of a slide in the U.S. dollar increase, it becomes increasingly attractive.

Of all the options for nervous investors, cash is probably the most palatable ? and safest ? for investors in the run-up to a default. But even cash can be problematic.

For most people, cash means a money market mutual fund.

In a default, however, money funds might not be the best bet. They aren't insured by the federal government. And they have about 15 percent of their assets in Treasury bills. Others use T-bills as collateral for repurchase agreements ? complex short-term loans.

You also could miss an enormous relief rally if the debt crisis ends well.

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