The potential for a debt limit crisis is only a few months away. While the root causes are subject to debate, arguing history while therapeutic does little in the way of providing guidance when it comes to portfolio management. How might one work with different portfolios, assuming readers of ITA are using a variety of portfolio models?
Here are a few options.
- Do nothing. Let the market oscillate and be prepared to ride out the ups and downs. Several ITA portfolios are designed to do just this.
- Move a significant percentage of holdings into cash, money market, short-term treasuries or other low volatile securities.
- Stick with the investment model regardless of market movement. Several ITA portfolio will work along these lines.
- Focus on income rather than growth.
Option 1: Two of the ITA portfolios are constructed to follow the broad equities market and they are: Copernicus and Schrodinger. These are portfolios set up for the long run so small or short market eruptions will not faze either portfolio. Ten years from now market action between now and when the debt limit crisis is worked out will be a mere blip on a market graph.
Option 2: Investors near retirement or in retirement are less inclined to see capital drift away as as one political party messes with the national debt. Two portfolios subject to losses are the Kepler and Einstein as their investment quivers are heavily oriented toward equities and equities carry higher risk. Yes, a debt crisis might impact other portfolios, but these two portfolios are particularly vulnerable. Equities not recommended for inclusion in the portfolio have tight TSLOs set under them. By “tight” I mean 2% TSLOs. Watch when these two portfolios come up for review. With both portfolios the owners prefer to retain capital and are willing to forgo potential growth. When cash becomes available, limit orders are set to pick up the broad market in the form of VTI by setting purchase orders at 5%, 10%, 15%, and even 20% below current prices. Limit orders might even be set lower in preparation of a major recession brought on by congressional mismanagement.
Option 3: Several ITA portfolios are using a management model designed to weather the debt limit crisis, should it occur. The four Sector BPI Plus portfolios quickly come to mind. They are: Carson, Franklin, Gauss, and Millikan. The two Dual Momentum portfolios (McClintock and Pauling) are also designed to limit bear market losses. Neither performed all that well in the 2022 bear market.
Option 4: The single income portfolio is the Huygens. Yes, the Newton and Curie are also income generators, but I don’t review them publicly. Bethe and Bohr also had a heavy income component, but I’ve been gradually shifting both over to the Sector BPI Plus model as that approach is gaining strength and confidence each month.
How one deals with the coming debt crisis is a function of age. The longer one has to invest, the less important this potential crisis is as it will be worked out in a matter of months. Perhaps weeks.
In the short term the crisis has the potential to provide buying opportunities. If the market takes a hit and declines, be prepared with cash to step in and purchase equity shares using VTI, SPY, VOO, or ESGV. As for where to put new infusions of cash, this is a time to build cash reserves.