"Don't do something: just stand there." -- John Bogle, Founder of the Vanguard Group
As we all know, America's debt ceiling problem has morphed into a crisis over the last few weeks. When confronted with a calamity, our brains scream at us to do something. In this particular predicament our national leaders are the ones who need to act. While it is hard to accept and nerve-wrecking to watch, there is very little the average citizen personally can do to make things better. Below are a few things you may be tempted to do -- and why you should sit tight instead.
DON'T go for the mattress
While it may sound far-fetched, some people are actually withdrawing large sums of cash from their bank and keeping it at home. During an uncertain time, this may seem like a prudent idea but there is no question that money is much safer in the bank since most American bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor per bank. No matter what happens with the wrangling over the debt ceiling and deficit, the FDIC's guarantee will not change. Neither the failure of your bank (which is unlikely) nor a government default would cause you to lose money in an FDIC-insured bank. If you have money in your home, however, it could be lost or stolen. Not to mention, it could be damaged by a fire, flood or disaster. In any of the aforementioned scenarios, your own insurance company will not cover your loss.
DON'T buy gold now
When people begin to believe the world is going to hell, they often rush to gold. They do so because gold is widely believed to be the one asset whose value rises the worse things get. If you bought gold three years ago, you bought it before it went sky-high. Congratulations! But with gold at or near all-time highs today, it simply doesn't make a lot of sense to bet it will move higher. After all, in the words of Warren Buffett, gold "doesn't do anything. You're hoping someone else in a year or five years will pay you for the thing." Hope is not an investment strategy.
DON'T sell stocks
As a result of the last-minute debt-ceiling deal, interest rates could spike, causing a stock market sell-off. It could be reminiscent of the market's reaction to the House of Representatives' original "no" vote on TARP in 2008 when the Dow dropped a record 700 points in one day. But as famed value guru Benjamin Graham was known to say, "In the short term the market is a voting machine; over the long term it is a weighing machine." If our legislators hit an impasse, investors will likely retreat from stocks but the fundamental value of American businesses will not actually drop similarly. In fact, a sell-off is likely to be an opportunity to buy stocks on sale since our congressmen would act in the face of the public outrage that comes with rapidly sinking markets.
DON'T make any rash financial moves
Everything above actually falls under this header -- they're all specific things one might do. The big umbrella statement, however, is that as scary as this period may seem, this is not the time to radically alter your own personal financial journey. So don't cash in your 401(k), don't lower your regular contributions to your retirement plans, don't try to time the market, don't radically shift your asset allocation. If you find yourself getting ready to make a big move, don't. Do nothing for, say, two weeks and then reassess your mood.