U.S. Downgrade: What Should the Average Investor Do?

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NEW YORK (MainStreet) — The U.S. had its credit rating downgraded from AAA to AA+ late Friday by Standard & Poor’s for the first time in history, but despite the concern among consumers and investors, financial planners argue the downgrade isn’t reason enough to make any drastic changes to one’s portfolio.

“If the portfolio you own is properly diversified and if your long-term goals haven’t changed, then you should not be making any changes because of this,” says Ric Edelman, a prominent financial adviser and founder of Edelman Financial Services. “Our concern is that a great many consumers don’t have a diversified portfolio.”

As several planners point out, the country’s credit rating was downgraded by just one of the three major ratings agencies and remains at a level on par with some of the most stable countries and financial entities in the market. Moreover, the ratings change does not actually change the country’s ability to pay back its existing debts.

For these reasons, the downgrade should not significantly alter the rules of the road for casual investors. Consumers should still maintain a portfolio with a healthy mix of stocks, bonds and alternative investments at a risk level that allows them to feel comfortable.

“If you are panicking, that suggests your portfolio is not properly diversified for your situation and is too risky for you,” Edelman says. “You need to own a portfolio that you can own during the bad times.”

That said, there are some slight tweaks investors could make to their strategies in light of the downgrade news and its aftermath.

Stocks

The turbulent stock market may frighten some onlookers, but financial planners argue now is the time to invest more heavily in stocks if you have the resources to do so.

"The goal with investing is to always be buying low and selling high,” says Paul Jacobs, a certified financial planner with Palisades Hudson Asset Management. “We’ll be selling from our cash and bond allocations, which are doing well, and buying stocks.”

Jacobs argues that the majority of stocks, from U.S. and international stocks to natural resources stocks, are “underweight” and can be added to your portfolio for less. Edelman puts the point more simply: “Stocks are going on sale.”

Bonds

Following the news of the downgrade, many questioned the impact it would have on U.S. Treasury bonds, but apparently the bond market never got the memo it was supposed to be in trouble.

“Ten-year Treasuries, the common thing you’d think investors would be selling off today, is rallying unbelievably,” says Fran Kinniry, a principal of Vanguard’s Investment Strategy Group. “I would never recommend people get out of Treasuries if that’s what they already own.”

As for other bonds, Edelman suggests avoiding long-term bonds and focusing more on those with a short-term maturity of five to seven years, noting concerns that there could be other credit downgrades in the future and a rise in interest rates.

Gold

Don’t jump for gold just yet. It may be at record levels, but that’s all the more reason to play it cool.

“Gold is experiencing a bubble,” Edelman says. “It may run up a little more, but when it bursts, it will crater way down.”

That doesn’t mean stay away from it entirely – it should be part of any diversified portfolio – but now may be the wrong time to bet it all on the gold rally to continue, advisers say.

When to Worry

“Most people that we see are reacting to yesterday’s news – or in this case Friday’s news – when what you should really think about is forward looking,” Vanguard’s Kinniry says.

Ultimately, the financial planners point to two signs that would show turbulent times are on the horizon. The first, according to Kinniry, would be skyrocketing interest rates, which would indicate that the market believed the U.S. to be a riskier investment. The other key sign would be a sharp decline in corporate profits, which would preface a major decline in the stock market, but Edelman says early reports show that’s not happening anytime soon.

“Investors have taken their eye off the ball and focused on political theater,” Edelman says. “Stocks are based on corporate profits, and when they remember that things will get better. This [down market] will be short-lived.”

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

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