What a government shutdown could mean for markets
9/30/2013 7:15:39 PM
Markets are under pressure as a budget battle in Washington threatens the first government shutdown in 17 years. The inability of lawmakers to compromise on fiscal matters and their tendency to squabble right up to key deadlines has investors on edge once again, causing volatility to spike. So, what might this mean for your portfolio?
Where we are
“The inability of government to hammer out a budget agreement has created a headwind for stocks,” says Azzad Equity Analyst Ahsan Raheem. “The budget debate coincides with the last trading day of the third quarter, the beginning of third quarter earnings season, and another potentially contentious debate over raising the debt ceiling.” Adds Raheem, “All of this is happening against the backdrop of concerns the Federal Reserve may soon end its bond-buying stimulus, which is arguably the biggest market mover of all.”
“However,” Raheem notes, “the market consensus is that a shutdown probably won’t last that long.” He and others have opined that once legislators start to hear about the impact of the shutdown on their constituencies, including the hundreds of thousands of government workers who will be furloughed, the tenure of any shutdown could be short.
What to do
Although the gut reaction may be to react hastily to the uncertainty and volatility that a shutdown can bring, there are a couple of solid reasons to stay the course.
1) You’ve got experience on your side. Remember that Azzad and our multiple money managers have gone through budget battles in previous years. We have been through these ups and downs before, positioning portfolios for major events and employing strategies designed to guard against downside risk.
2) A shutdown could ultimately be good for stocks. During the last two government shutdowns, the market actually rose 1.83 percent and 0.06 percent, respectively. These types of market events can create turbulence, which represent buying opportunities for investors.
How do you reduce risk? The most common answer is to diversify. By developing a balanced portfolio of investments, you as an individual investor don't put all your eggs in one basket. This is known as diversification. According to Modern Portfolio Theory, a portfolio that mixes a variety of asset classes generally has a lower risk for a given level of return. Diversification works because it broadens your investment base (though it can't guarantee a profit or protect against a possible loss).
Patience can be rewarded
In addition to diversification, remember that investing is a process—not an event. You should not make rash moves in response to occasional market moves.
Historically, time has helped moderate the riskiness of some investments (though there is no guarantee this will continue in the future). The standard deviation, or risk, associated with the average rate of return on an investment, the extent to which returns vary from historical norms, tends to decrease over time. In plain English, the longer you remain invested, or the longer your time horizon, the less likely you are to suffer from outsized risk.
The important thing is to stay invested, remain patient and stick to your plan. If you don’t have a plan, we can help. Give our investment advisors a call at 888.86.AZZAD. They will go over your risk tolerance, investment goals and time horizon if you’re just starting out. If you’ve already got a plan and just need some reassurance, they can review things to make sure you’re still on target to meet your goals.
Thank you for your continued trust and investment.
Opinions expressed are those of the author or fund manager, are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security and should not be considered investment advice.
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