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Preston Cherry, a certified financial planner and founder and president of Concurrent Financial Planning in Green Bay, Wisconsin, said the debt ceiling has led to an “anxiety build-up” among investors with existing financial concerns.
That concern may be greatest among retirees, soon-to-be retirees and even Gen Xers, who could face a retirement savings gap, said Cherry, who is also on CNBC’s Board of Financial Advisers.
While it’s hard to predict how the stock market will respond to upcoming debt ceiling negotiations, experts offer advice for investors.
1. Avoid “emotional selling”
When facing market volatility from events like the Russia-Ukraine war or facing a debt ceiling, Cherry said it’s important to avoid “emotional selling,” especially when the market is down. He said, “These events are really happening.” “So we want to help mitigate the emotional and financial impact.”
One reason emotional selling can be so harmful is that investors may be reluctant to re-enter the market, according to Lee Baker, CFP and owner of Apex Financial Services in Atlanta.
“They wait until after the market goes back up when they feel comfortable again,” said Baker, who is also on CNBC’s Board of Financial Advisers, and misses the recovery.
In fact, the 10 best-performing stock market days from 2002 through 2022 occurred after big declines during the 2008 economic crisis or the 2020 volatility of the COVID-19 pandemic, according to a JPMorgan analysis.
In the grand scheme of things, I guess [the debt ceiling] Becker said. “Over a decade ago, it was ugly for a while. But we’ve obviously rebounded fairly well.”
2. Watch for buying opportunities
The chance to buy more assets at a discount can be a silver lining to market volatility, assuming you’ve already achieved other financial goals. “Everyone likes a good sell,” Cherry said, noting that a 10% to 15% pullback could be a strong buying opportunity.
Baker also monitors declines by about 10% to “deploy fresh capital” by holding the cash in a floating rate Treasury exchange-traded fund that can be sold quickly if necessary. “If there’s a falter,” he said, “let’s get some stuff cheap.”
3. Maintain cash reserves
While it may be tempting to purchase assets at a discount, it is also important to preserve your money.
Most Americans aren’t prepared for a financial emergency, according to a recent CNBC/Momentive poll. The survey showed that more than half of Americans do not have an emergency fund, and 40% of those who do have less than $10,000.
While experts usually suggest keeping three to six months’ worth of living expenses in cash, others may suggest larger reserves depending on how long unemployment may last.
Cash is also essential for retirees, who may need the cash to avoid selling assets when the market is down. Known as the “risk-return continuum,” research shows that exploiting your portfolio during market downturns causes long-term damage to your nest egg.
“You need to reserve a few months to get through those periods,” said Baker, who advocates holding at least 12 months of portfolio distributions in cash.