How to know what to do, when it’s hard to know what to do

How to know what to do, when it’s hard to know what to do

We just wanted to touch base with a brief note on the S&P downgrade of US long-term debt and the ongoing volatility in the stock market.

To begin with, we believe that the actual downgrade was a bit of grandstanding by a company desperately trying to burnish it’s deeply tarnished reputation.  It’s worth remembering that S&P rated all those toxic mortgage bonds AAA right up until they blew up and took the economy down.  Nor has S&P done much better with individual companies, rating Enron debt “investment grade” until four days before the company went bankrupt.

At the end of the day, the impact on the Treasury’s ability to borrow at low rates is likely to be negligable.  We’ve actually seen a rally in the Treasury market today with the usual “flight to quality” that occurs every time world markets get nervous.  Which means that, at least in the short-run, the government’s cost of borrowing has gone down, not up.  It’s worth noting too that the downgrade to AA+ (still a very high credit rating) does not apply to short-term Treasury securities, which retain their AAA rating.  Among other things, this suggests that money market funds, which normally hold a lot of short-term Treasury securities, should be unaffected by this move.

In the end, we believe that current market volatility is less the result of any one thing and more an expression of the anxiety arising from the accumulation of a number of factors.  Among these are debt worries and slowing growth in the Eurozone and slower-than-expected growth in the US.  These are real matters of concern, to be sure, but we don’t believe they form the basis for a change of course with respect to your investments.  As I noted in an Associated Press article that hit the wires this morning, the reason for having an investment plan is to make it easier to know what to do in times like these.

And as we noted on Friday, it’s usually better to be resilient than nimble.  The way to survive and thrive through all the inevitable ups and downs in the market is to save and invest, diversify and rebalance, and maintain prudent reserves.

In the meanwhile, if you’re looking for a way to take your mind off the news just now, you might revisit our list of “ways to Live Big during trying times”.  As always, we continue to welcome any new additions you’d like to make to the Live Big List.

The Yeske Buie Team

Dave Yeske