Your Money: How should investors react to the debt deal?

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JIN LEE / Bloomberg News

Forget, if you possibly can, the hysteria in Washington. No one in the White House, Senate, or House of Representatives seems cheered by the deal hammered out, in a near-panic, Sunday night.

That includes the markets, which opened Monday morning and plummeted before reeling in most of the losses before the end of trading. The Dow closed down nearly 11 points, and the S&P lost more than five points.

Right now, government has few remedies for a weak economy, hunkered-down consumers, and frightful levels of unemployment.

So what's an investor to do? The times are troubled, and the choices are not clear-cut.

Option One: Move to cash right now to protect your investments. The problem with this approach? If the markets shrug off the choppy environment in Congress, and rally off recent weeks of declines, these investors will miss out on any rally-related gains, since their money will be sitting in cash while the markets take off.

Option Two: Move into equities right now. Bet that the markets will ignore the political divisions and instead focus on values and generally positive quarterly earnings reports, and turn higher.

Option Three: Let some time pass between the outcomes in Congress and the investment choices you make. Stand pat for a bit. Give the markets a chance to find their course in the aftermath of the tensions in Washington. Then decide between going to cash or loading up on equities.

Two experts, however, cut through the fog with declarative guidance.

One concerns a drop in the markets despite an agreement in Congress.

"If the markets don't rally, it will be a very bearish indication," says Richard Russell, a longtime market technician who writes the Dow Theory newsletters. "The real horror would be if the debt limit is solved and the market continues to go down."

Monday's market performance quickly comes to mind, though no votes had been taken in the Senate or the House when trading ended. But it is something to consider.

Another one regards a cut in the deficit.

"Short term, any cuts in the deficit will hurt the economy," says Robert Weidemer, coauthor of the book Aftershock and managing director at Absolute Investment Management L.L.C., which runs about $130 million.

But debt deal or no deal, it hasn't changed his portfolios at all. He and his colleagues still hold 20 percent of client assets in gold, 30 percent in U.S. Treasurys, mostly five-year or shorter maturities, and the remainder in foreign currencies such as the Canadian dollar and Swiss franc, high-yielding dividend stocks, and agricultural commodities.

IndexIQ Inc.'s chief executive officer, Adam Patti, contends that it might be prudent to use hedged funds, among them IQ Hedge Macro Tracker ETF (MCRO) and IQ ALPHA Hedge Strategy Fund (IQHIX). They take long and short positions in exchange-traded funds and other exchange-traded vehicles, aiming to make money either way the market moves. But always check fees for these types of hedged funds - they can be more expensive than just a straight mutual fund or exchange-traded fund, and that eats into potential returns.

The aim of your portfolio is to provide downside protection in case the equity markets remain weak, while simultaneously providing upside participation if the markets respond positively. Over at Glenmede Trust Co., the private bank and wealth adviser, director of investment strategy Jason Pride says some corporate bonds may be a better pick than U.S. Treasurys, if you're nervous about the government's creditworthiness.

"Is a "AAA"-rated corporate bond (Johnson & Johnson, for instance) a better credit than the U.S. government?" Pride asks in his latest letter to clients. "Normally, the answer is no, given the U.S. government both raises taxes and prints money.

"However, these are not normal times and the U.S. is perhaps not as risk-less as thought. It is possible a large multinational corporation could be a better credit than the U.S. government at a future point, although we are not there yet.

"Perhaps a more interesting question is whether a corporate credit is a better investment than a U.S. Treasury bond. In this case, our answer is 'yes,' given such investments offer higher yields and are one step removed from U.S. debt dynamics."

Richard Russell also recommends sticking with gold, which he contends has not hit bubble territory yet, despite its long surge.

 


Erin E. Arvedlund is a finance reporter and lives in Philadelphia. Contact her at 1-646-797-0759 or erinarvedlund@yahoo.com.