Preparing For The Deficit Debate



What options are available to investors as we approach the deficit debate?  For many years raising the debt limit was a non-event.  However, it is a different political climate and we now need to cope with a large number of “non-negotiators” which in turn bring uncertainty to the financial markets all over the globe.  To deal with these uncertainties, here are some possible suggestions as to how to navigate through what is likely to be a mess.

1.  Do nothing other than to keep the asset classes in balance.  This decision is one where the investor expects the politicians will work out a compromise and the markets will settle down by summer.  The decision to do nothing further assumes one does not have a clue how the global markets will react to U.S. political arguments.

2.  Sell all holdings and go to cash.  This move is an extreme market timing decision.  While one may make the correct move to exit the market, this decision also requires another major move when to get back into the market.  There are tax implications and possible commission expenses unless one is using commission free ETFs.

3.  Raise sufficient cash so one can short the market by purchasing an ultra-short ETF such as SDS to carry one through the “treacherous sea” period.  Should the market take a dive, SDS will rise in price and buffer the down-draft.

4.  Another possibility is to activate the ITA Risk Reduction (ITARR) model.  Rather than wait until the monthly (32 days in our case) portfolio review period arrives, monitor the key ETFs on a daily basis and when the price of a given ETF drops below its 195-Day Exponential Moving Average, exit the asset class and then wait a month before checking whether it is time to move back into the market with that particular ETF.

While there are other options such as setting up a very defensive portfolio, such moves are quite complicated and will vary from individual.  The above four options are basic and easy to understand.