Managing portfolio risk in a vacuum

October 4, 2013by Hoy Grimm0

hoyBecause of my Teutonic roots, I have always been fascinated by Oktoberfest. If I were a beer drinker, I would have made the trek to Munich to celebrate with the locals. I learned this week that Oktoberfest culminates with the German Unity Day which commemorates the 1990 reunification of East and West Germany. If only our politicians would follow their lead.

Now that the Government shutdown has moved from unlikely to a reality, investors need to adjust their portfolio management techniques. Pimco’s Bill Gross calculated that each week of the shutdown will reduce GDP by .1%. I don’t know how he calculated this or how accurate his number is but his efforts to discern the economic effects of the shutdown and its impact on his investments should be copied by individual investors.

When circumstances become as unsettled as they are right now, investors should first remind themselves of their investment time frame. If you are within 5 years of retirement, it wouldn’t be a bad Idea to reduce your stock market risk, especially considering that the market is 4 years into a bull market. If you have 10 years or more then this current debt standoff isn’t as important to your long term financial success as being disciplined about your spending and maximizing your retirement plan contributions.

In addition to barricading open air national monuments, the government shutdown also means that the normal flow of economic data that investors rely on will be embargoed. Aside from the uncertainty over the debt debate, Third quarter corporate earnings are being revised down at a rapid rate. Stock trading volumes are at 4 year low while prices are at 4 year highs. The stock market needed a mountain of QE cash from Fed stimulus to reach these heights and may only need a faint whisper of crisis to drop sharply.

Refocusing on your personal investment goals is the best way to keep these uncertainties from influencing you into making a poor short term decision. Investors could spend hours analyzing all of the various outcomes of the debt debate and still not find a clear investment path through all of the partisan rhetoric. Sometimes economic truth can become so obscured that even the largest investors with the deepest resources can’t discern the future. Save time and remind yourself why you are invested and how long you need to stay invested to reach your goals. The answers to these questions should have more influence on your decisions that the partisan divide in Washington.

Hoy Grimm

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