Debt Ceiling: Let's Make a Deal!
With one week to go, there are now competing deficit reduction plans. Both the Boehner/Republican and the Reid/Democratic proposals aim to cut the deficit over the next 10 years, would make $1.2 trillion in discretionary cuts and do not call for any new tax increases. The plans diverge in the implementation: the Boehner plan raises the debt ceiling in two phases-this year and next, while Reid's would immediately raise the debt ceiling.
I discussed the dueling debt deals with CBS television stations this morning:
After all the hand-wringing over the debt ceiling, neither plan speaks to what the majority of Americans want. According to a recent CBS News poll, 66 percent of Americans believe that the deal to raise the debt ceiling should include both spending cuts and tax increases. Only 28 percent said they thought the deal should contain spending cuts exclusively, and a mere three percent wanted it to include tax increases only. Other polls include similar findings.
OK, so that's clearly not going to happen, so where does this leave us? Even if lawmakers reach a debt ceiling deal before the August 2nd deadline, the ratings agencies still might cut the US credit rating. The loss of triple-A rating could prompt a stock and bond sell-off, because many mutual funds, pension funds, banks and investment advisors create allocation rules based on holding a certain percentage of AAA debt. The IMF noted that such a loss in investor confidence could have "universally large and negative" effects on the rest of the world.
Understandably, people are freaking out about their investments right now. A number of callers to my radio show asked me to create a "Debt Ceiling Debacle Portfolio", even though for most long-term investors, a well-diversified, balanced portfolio should see you through this period.
For the Cassandra's out there, here's the portfolio--make sure to check with your advisor or broker to see if this makes sense for you:
Debt Ceiling Debacle Portfolio
- 15% laddered CDs
- 20% Cash (just in case the bottom falls out, you want to have money available to buy)
- 20% Bond Fund (Vanguard's Intermediate Term Bond Index fund (VFICX), Vanguard Short-Term Investment Grade fund (VFSTX), Vanguard Total Bond Market Index Fund (VBMFX), Schwab Total Bond Market (SWLBX), Fidelity U.S. Bond Index (FBIDX)
- 15% International Bond Fund T. Rowe Price International Bond Fund (RPIBX) or if you want to assume more risk, you can add the T. Rowe Price Emerging Markets Bond (PREMX)
- 10% Total Stock Market Index Fund (Fidelity Spartan Total Market Index, Schwab 1000 Index Fund Investor or Vanguard Total Stock Market Index)
- 10% International Stock Index Fund (Fidelity Spartan International Index (FSIIX), Vanguard Total International Stock Index (VGTSX)
- 5% Emerging Markets (Vanguard Emerging Markets Stock Index (VEIEX) or T. Rowe Price Emerging Markets Stock (PRMSX)
- 5% Commodity Fund (Harbor Commodity Real Return Strategy (HACMX) or for gold bugs out there, Vanguard Precious Metals and Mining (VGPMX))
