US Default: A Doomsday Portfolio
Talk about a Black Swan event--US default has only occurred five times in the country's history. In 1779 (government unable to redeem the continental currency issued during the Revolutionary War); 1782 (the Colonies defaulted on the debt they took out to pay for the war); 1862 (during the Civil War, the Union failed to redeem dollars for gold at terms stated by the debt contracts); 1934 (amid the Great Depression, FDR defaulted on the debt issued to finance World War I); and in 1979 (bureaucratic snafu resulted in missed interest on some small bills).
So let's admit that while it's not impossible, chances are that a full-on default is unlikely. That said, many of you have asked whether they should do something in their portfolios, "just in case." For most long-term investors, a well-diversified, balanced portfolio should see you through this period, just like it got you through a much scarier time in 2008-2009.
As my pal and MoneyWatch blogger Allan Roth says, "Investing is a long-term proposition and the more we speculate in the short-term, the lower our returns are likely to be...I'm sticking with my balanced portfolio of mostly index funds and CDs."
Yeah, I know...you still want to see my "Doomsday Portfolio". Please check with your advisor or broker to see if this makes sense for you, because it probably doesn't.
Debt Ceiling Doomsday 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))
- Your Investments and Looming Default
- 6 Ways a Credit Downgrade Could Cost You
- Debt Ceiling: What Happens on August 2nd?
