If you open a newspaper, turn on your television or go online, you can't miss it: It's all debt ceiling, all the time. Like everyone else, you're probably eager for the drama in Washington to end, and puzzled as to why it's taking so long. But you also may have one specific question: "What will happen to my investments, under any scenario?"
Let's quickly review the nature of the debt ceiling and what might happen if it were not lifted. The debt ceiling is the legal limit on borrowing by the federal government. If Congress doesn't increase the limit, borrowed funds wouldn't be available to pay bills, so the United States could be forced to default on its debt obligations. To avoid this outcome, Congress has regularly raised the debt ceiling in the past.
This year, however, the debt ceiling has become a point of global concern as the effect on the United States' credit rating has been scrutinized while political contention between Congressional leaders and the Obama administration remains. Nonetheless, although time is running short, Congress can still take action before Aug. 2, the estimated date when temporary actions to avoid default are exhausted. (The actual debt ceiling was reached in mid-May).
As you await the resolution of the debt ceiling dispute, here's what you can do:
* Don't make hasty decisions. An agreement to raise the debt ceiling may not happen until the last minute. But even if the Aug. 2 deadline passes, the United States can still find ways to make payments on its debt for a while. So don't rush into any investment decisions based on the most dismal scenario. We still have the world's largest, most powerful economy, and it's well capable of withstanding a missed deadline.
* Be prepared for short-term volatility. If Congress misses the Aug. 2 deadline, nervous lenders might start demanding higher interest rates on their investments in U.S. Treasury securities. This could cause market interest rates to rise across the board, leading to declines in bond and stock prices. Such a drop could well be sharp, but it doesn't necessarily predict an extended downturn. In fact, a decline would probably be short-term, as chaotic financial markets would likely force Congress into taking timely action on the debt ceiling. So, brace yourself for a possible market drop, but don't abandon a proven strategy of diversifying your investment dollars across a range of quality vehicles.
* Put debts and deficits into perspective. After the debt ceiling issue is resolved, many investors may still be concerned about the country's debt and deficit situation. But over the long term, the financial markets have been basically unaffected when debt levels have increased or decreased. So, keep making investment decisions based on your individual goals, risk tolerance and time horizon.
The debt ceiling is certainly dominating today's news -- but you're investing for tomorrow's goals. By staying calm and sticking with sound investment strategies proven to help you achieve long term goals, you'll find there's no "ceiling" on what you can attain. For in-depth help with your investor concerns, consult a financial adviser.
This article is provided by Linda Stirling, a Financial Advisor at RBC Wealth Management in La Jolla, and was prepared by or in cooperation with RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC. The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.