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.
A Review/Comparison of Momentum Systems
ITA Portfolios: Summarizing Investing Approaches
Richard Dougherty says
Thanks for the very timely post. I question the suggestion to move a significant percentage of holdings into money market or short-term treasuries. If a money market is invested in government obligations and the government is forced to default on interest payments or redemptions, could this result in large withdrawals from the fund which could, in turn, “break the buck?” I would have similar concerns should the government default on treasuries. It would be great to know your take on this.
Lowell Herr says
I recall the last time “break the buck” threatened the markets. It rattled everyone’s cage, including mine.
The only good solution I have is to vote the “knuckle-draggers” out of office. (g)
One possibility is to set a conditional buy order in at a much lower value should a security be sold. This is one classic situation where markets don’t like uncertainty.
Ernest Stokely says
Richard, I think if we go into any kind of significant default, and especially if we “break the buck,” there will be no place to hide. Maybe gold, but a default would be a catastrophic situation. Lowell’s outline of the choices is pretty clear, but there is no optimal choice. It depends on one’s appetite for risk and the time horizon for investing.
Lowell Herr says
Ernie et al.,
Perhaps I should have added another option and that is to build cash in a saving account, if possible, and have it ready to move into the brokerage account in order to purchase stocks (VTI for example) at a lower price. This is not easy to do as lows are nearly impossible to pick and the market will rebound in a flash should there be a settlement.
Messing with the debt is a major hardship on the small investor – unless they are willing to ride out the market as the Copernicus and Schrodinger will do.
Richard Dougherty says
Lowell and Ernie,
Thank you very much for your replies.
Some other options might be CD’s which are FDIC insured.. Schwab is offering CD’s with varying maturities that pay in the range of 4% to 5% and are insured for up to $250,000. I believe everyone who has concerns should investigate the subject to make sure they have the protection they need since there are ways to increase coverage beyond $250,000 if needed as well as limits.
Considering the political consequences, it is doubtful there will be defaults and will certainly be resolved before years end. Lets hope.
Richard Dougherty says
Lowell, Ernest et al.,
I did some additional research on what is covered by FDIC insurance this weekend and found a publication put out by FDIC which covers the subject. It does address the types of holdings that are covered and not covered. It also covers the limits of coverage on various combinations of accounts. They do say that mutual funds are not covered by FDIC. If your money market fund is a mutual fund, it would not be insured by FDIC. There are money market funds that are called Deposit Money Market Accounts (DMMA) that would be insured. The limit of coverage gets a bit complicated when multiple accounts, trusts, etc. are involved. The FDIC publication covers those areas well. Here is a link to the publication for anyone who may be interested: https://www.fdic.gov/resources/deposit-insurance/brochures/documents/your-insured-deposits-english.pdf