October 5, 2013
As you’re well aware, a partial government shutdown began on Oct. 1. No matter what one’s views are on the political issues that led to this event, it’s probably fair to say that a shutdown is not particularly good news, on many fronts. Although essential services will continue, including Social Security and Medicare payments, other governmental functions will be disrupted, and hundreds of thousands of workers will be furloughed. So, as a citizen, you may well have concerns about the shutdown. But how will the shutdown affect you as an investor?
First of all, you may want to take to heart the slogan popularized by the British in World War II: “Keep calm and carry on.” You don’t need to panic, nor do you need to make massive changes to your investment portfolio or even take a “time out” from investing. It’s highly likely that, like all political/economic traumas in the past, this one, too, shall pass.
To gain some perspective, you might be interested in knowing that the current situation is not unique. We’ve had 17 government shutdowns in the past, most recently in 1996. And the overall effect of these shutdowns on the financial markets has not been particularly negative. Stocks dropped during nine of these shutdowns and rose during the other eight. Once the shutdowns ended, the average stock market gain was 2.5 percent over the following three months and 13.3 percent over the following 12 months, according to an analysis of the S & P 500 stock market index.
Of course, as you’ve no doubt heard, “past performance cannot guarantee future results,” so you shouldn’t necessarily expect the market to turn in similar results once this current shutdown is over. Nonetheless, the history of the market’s performance following government shutdowns does tell us something about the tremendous ability of the financial markets to absorb short-term crises — and then move on.
This isn’t to say that you won’t see some volatility in the days and weeks ahead if the shutdown continues for a while. The financial markets do not like uncertainty, and while some of this uncertainty may already have been “factored in” during the past few weeks, as the possibility of a shutdown increased, we may still see some significant price gyrations.
Try not to overreact to these price swings, if they do occur. If you feel you must do something with regard to your investments, why not take this opportunity to look over your long-term strategy to make sure it’s still properly aligned with your goals, risk tolerance and time horizon? Over time, your personal situation can change in many ways, so it’s always a good idea to review your investment portfolio, and to make those changes that can help you continue making progress toward your objectives, such as a comfortable retirement.
Furthermore, if we do see some price declines, you may well be presented with the opportunity to buy quality investments at good prices, so stay alert for these possibilities.
Above all else, don’t let the headlines of today scare you away from investing for tomorrow. With patience, discipline and the ability to maintain a long-term perspective in spite of short-term events, you can develop good investment habits that will serve you well for a lifetime.