I’d like to divest from oil and gas,” I said firmly. My request felt urgent. The world itself was at stake.

It was 2015, and my answer wasn’t what the financial advisor was expecting when he asked how he could help. Todd, who worked at a large investment firm, was assigned to work with me.

This was his introduction. Basically, “Hi, my name is Corenna, and can you help me pull my money out of anything environmentally problematic?”

I had recently earned my master’s degree through a program focused on conservation, and I had spent a fair amount of time thinking about climate change.

As a result, I tried to be intentional in my daily decision-making, including being cognizant of where my dollars were going and what they were supporting. I was far from living a carbon-free life, but I felt good about trying to reduce my footprint when I could.

But one day, a guilty realization struck me. Are any of my efforts worth anything at all if I’m simultaneously investing in the oil and gas industries? I’m literally profiting every time they are.

Like many people, I didn’t really know much about the stock market. I had no idea what I was invested in, or – to be honest – how investing in the stock market really works. So, when I declared that I wanted to divest from oil and gas, I thought it would be as easy as simply declaring my wishes and then someone – in this case, Todd – making it happen.

I don’t remember exactly how our conversation went, but I do remember Todd gently explaining that it wasn’t as straightforward as picking a few companies to avoid. Which companies don’t rely on oil and gas to do business? Hmm. I admitted I didn’t know, but wasn’t it someone’s job to figure it out?

Perhaps even more interestingly, he said that as a fiduciary, he wouldn’t – couldn’t! – let me divest from oil and gas. It was just too early for that. The world still depended too heavily on both.

I remember hanging up the phone feeling exasperated, disappointed, even angry. How would the world avoid climate crisis if investor – myself included – continued to pour money into oil and gas?

I tried not to think about the gap between my values and my investments. It didn’t feel good.

Years later I started working at Park Piedmont, and I thought, “Here’s my chance!” But through ongoing learning from PPA advisors, I’ve come to realize that it still isn’t that straightforward.

PPA Financial Advisor Sam Ngooi explains why.

Like Corenna, others may also struggle with how best to express one’s values through money. Why can it feel so challenging to achieve? For one, money is emotional. Feeling powerless or overwhelmed by how we use money can be uncomfortable and can cause us to question our identities and how we move about the world.

Luckily, things have progressed since 2015, and there are an increasing number of options for expressing values within one’s portfolio. For one, ESG investing focuses on environmental, social, and governance data about a company.

Company metrics around carbon emissions, worker safety, leadership diversity, and the like are rolled into a comprehensive score to help guide investors on whether a company is a sound investment. Climate-conscious investors like Corenna might seek out “green” companies that scored high on environmental measures, reallocating their funds away from “brown” companies with high greenhouse gas emissions and low environmental scores.

Alignment between money and sustainability values achieved, right?

Not necessarily. There are more than 600 rating agencies and systems, each with their own methodology that can lead to a single company earning a range of scores. A single numerical score, while easy to digest, combines a range of variables at the expense of nuance.

According to The Atlantic, “A company that has high carbon emissions and an ordinary record on diversity, but excellent corporate governance, can end up with a very high overall ESG score.” For someone who supports diversity and inclusion efforts but prioritizes sound environmental practices above all, a flattened ESG score can obscure the very details that help discern how a company’s values measure up next to their own.

It’s also easy to assume that a high ESG score means a company is proactively progressing towards better practices with a net positive impact. The Atlantic writes, “MSCI, one of the most influential ESG-rating firms, describes itself as ‘enabling the investment community to make better decisions for a better world’ and declares, ‘We are powered by the belief that [return on investment] also means return on community, sustainability and the future that we all share.’”

In actuality, an MSCI ESG rating measures a company’s exposure and resilience to financially material environmental, societal, and governance risks. This means a company might be a big carbon emitter, but if climate change doesn’t pose a big danger to its operations, it might have a higher ESG score.

Some academics and analysts have also questioned whether the E in ESG is useful as it’s currently defined. Recently, Yale Professor of Finance Kelly Shue and Boston College Finance Professor Samuel Hartzmark launched a research project to measure the impact of sustainable investing on “brown” and “green” firms’ environmental impact. Shue and Hartzmark found that green firms with increased investment capital don’t see a huge change in their environmental impact.

As Shue notes in a recent Freakonomics episode, “[Green firms are] mostly services firms that already don’t pollute. So, when they get more money, they continue not polluting. And they’re also not the best candidates for developing green technology because it’s not part of their business model.”

In contrast, brown firms tend to respond to reduced investment capital by becoming more brown, either by cutting back on pollution-abatement efforts or by reducing spending on green initiatives and investments.

Thus, although it’s counterintuitive, divesting from brown firms might be counter-productive. It raises the cost of capital and forces short-term decisions focused on survival, rather than allowing for longer-term decisions focused (we would hope) on more sustainable innovation. This often leads to more pollution rather than less.

It’s important that brown firms have enough capital to innovate. Shue says, “The brown firm typically pollutes 260 times as much as a similarly sized green firm. So, if that brown firm were able to cut its emissions by just a mere one percent, that is actually way better for the environment than the green firm cutting its emissions by 100 percent.”

Shue also points out that brown firms exist in sectors critical to a well-functioning society (e.g., energy, transportation, agriculture, and building materials). “Punishing” these companies through financial failure is not only counterproductive to their progress but also might have unintended negative consequences on society as a whole.

This realization has given rise to investment options and initiatives that engage with brown firms to make them greener, such as by using ESG data and shareholder voting to encourage more sustainable policies.

So, avoiding companies with low-ESG scores might not have the impact we expected. Maybe you’re surprised by that too.

Does that mean ESG investing is pointless, or that it won’t continue to improve? Should we give up altogether?

Not at all.

The key is to shift our thinking and expectations. We can recognize that relying on an ESG ranking or score to guide investment/divestment choices is certainly a convenient option, but not a perfect solution for clear conscience investing either.

That said, a significant benefit of ESG data is the increased transparency and detail it provides about a company. More than ever before, investors have information at their fingertips to guide their decision-making.

And if the journey feels overwhelming – as it did for Corenna in 2015 and, as she’d admit, it still sometimes does – remember, you don’t have to travel it alone.

Our job as advisors is to walk alongside you, to share new information as it becomes available, and to help you align your finances with your values and goals – whether you’re focused on the short-term, the long-term, or generations into the future.

I read recently that Sotheby’s will auction off Queen front man Freddy Mercury’s very eclectic collection of personal items this fall. Included are his handwritten notes and lyrics to Queen’s iconic anthem, “We Are the Champions.”

Sotheby’s expects to offer it at $250,000. This is an expensive piece of music history – though way short of Bob Dylan’s handwritten notes for “Like a Rolling Stone,” which sold for $2 million in 2014.

I don’t consider myself a packrat (other family members may disagree), but I do have a fair amount of “stuff,” most of which has absolutely no monetary value but does hold significant sentimental value. My office décor includes some collectibles and a fair number of personal items.

One item in particular that has absolutely no value – other than being an extremely heavy paperweight – is a jeweler’s vise from “Gotthold Jewelers,” a jewelry store my family owned and operated from the late 1800s until the early 1960s.

I did, however, learn recently that my first guitar, a 1972 Fender Mustang, is somewhat collectible – it’s appreciated significantly from the $100 it cost 50 years ago.

How much do you think it’s worth now? (Answer at the end of the article!)

Artwork and collectibles have always had a place on the decorative walls of society. People enjoy the beauty (nothing pretty about a company stock certificate) and tangibility of art. Artwork and collectibles are great conversation starters: tell me about this piece, who is the artist? How did you learn about them, and why is the piece special to you?

We’ve all heard stories of finding valuable works of art at garage sales or stumbling upon a rare baseball card in a parent’s attic. But have you given any thought as to what you would do if you learned one of your personal possessions or collectibles suddenly increased in value? Would it change the way you look at it or appreciate it? Does it take away or add any sentimental value?

Take, for example, if you learned that painting hanging in your living room that you purchased years ago from an unknown artist is now very valuable. Do you sell it, or does it bring so much happiness to your home that you can’t imagine parting with it? Do you now think of it as an investment?

Adding artwork or collectibles to one’s asset collection can be rewarding from both a personal enjoyment perspective and – at least potentially – a financial one. In addition to artwork, some of our clients have purchased (not invested in) tangible collectibles such as a rare baseball card collection, antique jewelry, pottery, rare vintages of wine, antique cars, and music memorabilia. Everyone enjoys a conversation piece. All these items can bring value to our lives and make wonderful additions to our home.

At the same time, purchasing these types of assets can also be quite risky. There is never a guarantee that a purchase will appreciate at all, let alone dramatically. We would also call them “illiquid” assets, in the sense that they can be expensive and time-consuming to buy or sell. (“Liquid” assets, by contrast, include your investment portfolio, where purchases and sales can be done at low or no cost and very quickly.)

For most clients, artwork and collectibles aren’t part of an overall financial plan and wouldn’t be considered part of the assets needed to attain one’s financial goals. (That’s not always the case; individual client portfolios of course vary.) We would think of artwork and collectibles as existing on the periphery of one’s asset allocation. We encourage clients to enjoy them from a purely aesthetic perspective. If they appreciate significantly in value, that’s a bonus.

For clients whose artwork and collectibles are a significant asset, PPA can provide advice as to how these illiquid assets fit into an overall portfolio and incorporate them in the retirement planning illustrations we run for clients.

In the case of my 1972 Fender Mustang – it’s now worth about $10,000. Not a bad return over the past 50 years! Not quite enough to fund an early retirement, but I could certainly find a way to spend it since my rockstar dreams never quite came to fruition.

At the same time, I’m not ready to play that last chord – so for now it’ll stay a conversation piece in my collection.

Sentimental value wins again.

The Park Piedmont team will be off this coming Monday, June 19, in commemoration of Juneteenth National Independence Day. Juneteenth is a federal and public U.S. holiday on which federal banks are closed. Stock and bond markets will be closed as well. We will return on Tuesday, June 20.

Juneteenth is at once a long-running holiday and one whose name and meaning may still be new-ish – so we want to take a moment to share a bit about the holiday’s history, along with other resources if you’d like to learn more.

Alternatively referred to as Emancipation Day, Freedom Day, and Jubilee Day, Juneteenth is a holiday that takes place each June 19 to recognize the emancipation and freedom of the African Americans enslaved before June 19, 1865.

The Juneteenth celebration began with the freed slaves of Galveston, Texas. While the Emancipation Proclamation freed the slaves in the South in January 1863, in reality it was practically unenforceable any place not under control of the Union Army. Until the Civil War ended in 1865, this was the case across large swaths of the country.

Even then, it took an additional two months for news of the war’s end and emancipation to reach all enslaved Americans. It was on June 19, 1865, when Union Maj. Gen. Gordon Granger and his troops arrived at Galveston, sharing the news that the war was over and the enslaved were now free.

During his visit to Galveston, Granger delivered General Order No. 3, which stated:

“The people of Texas are informed that, in accordance with a proclamation from the Executive of the United States, all slaves are free. This involves an absolute equality of personal rights and rights of property between former masters and slaves, and the connection heretofore existing between them becomes that between employer and hired labor.”

The following year (1866), the now-free African Americans started celebrating Juneteenth in Galveston.

Juneteenth observance has continued ever since, although widespread Jim Crow laws enforcing racial segregation compelled the celebrations to take place in private (non-public) spaces well into the mid-20th century.

Park Piedmont Advisors is a firm that has long valued financial independence and serving our clients’ best interests with thoughtfulness and integrity. As we approach our work, we are hopeful about the future and, at the same time, clear-eyed about the widespread injustices of the past. We are mindful of the continuing racial wealth gap that originates from the institution of American slavery, and the myriad ways that a lengthy history of legally-sanctioned segregation has contributed to ongoing inequality. As individuals and as a firm, we welcome the opportunity to celebrate Juneteenth and take seriously our ongoing responsibility to be informed and engaged citizens.

We invite you to learn more about the historical, economic, and cultural legacy of Juneteenth through some of the following resources:

• The National Museum of African American History and Culture
• CBS News interview with Harvard Prof. Henry Louis Gates, Jr.
• “The History and Meaning of Juneteenth” – New York Times The Daily podcast interview with Dr. Daina Ramey Berry, a professor of history at the University of Texas at Austin
• On Juneteenth by Pulitzer Prize-winning historian and Harvard Prof. Annette Gordon-Reed

We wrote recently about a Freakonomics book called Think Like a Freak. That book included many important pieces of advice related to the personal financial advice PPA provides our clients.

I just listened to a Freakonomics Radio podcast, “Here’s Why All Your Projects Are Always Late – and What to Do About It,” that has similar relevance to behavioral finance, a topic we discuss often.

The podcast addresses what the psychologists Amos Tversky and Daniel Kahneman (Nobel laureate and of Thinking, Slow and Fast fame) call the “planning fallacy.” This refers to people’s tendency to underestimate the time, and in most cases the costs, required to complete a project similar to one that’s been done before. Host Stephen Dubner referred to it as the “gap between intention and behavior.”

I expect this sounds familiar to you; it certainly does to me. Likely my worst example of falling victim to the planning fallacy is my stockpiling of old newspapers. (I don’t read the news online, and never will.) Although this may not seem like a typical project, I like to stay up-to-date, and generally find many topics interesting. So I keep papers for weeks, if not months or years. This has meant huge stacks in our garage, next to the exercise bike where I try to catch up. But there typically comes a reckoning when I realize I have to recycle at least some (but not all, since I’ll get to it someday, of course) of the mountain.

The podcast goes on to describe a few concepts related to the planning fallacy. One is “optimism bias,” which describes many people’s overconfidence that the next project will turn out just as they plan it, despite any cost or time over-runs experienced in the past. The optimism bias can have positive results, including encouraging people to start new projects in the first place. But it can also lead to excessive risk-taking and waste.

This is related to “strategic misrepresentation,” which describes the incentives we often have to understate project costs and time and overstate likely benefits. This is especially true when projects are awarded based on the lowest estimates of cost and time and/or the highest promised benefits. Without controls in place to identify “responsible” low bidders, these practices can lead to disasters for project sponsors. (For New Yorkers reading this, the nightmare project cited in the podcast is the Second Avenue subway, which started planning in 1968 and still isn’t finished 55 years and several billion dollars later.)

Two other behavioral issues impeding projects are “continuous partial attention” and “coordination neglect.” The first describes how we often fail to devote our full attention to projects, especially in this age of constant text/e-mail notifications and social media updates. One interviewee claims that it take 23 minutes (!) to fully recover attention after an interruption. The second issue refers to the difficulty of working together to make sure the various parts of a project are done correctly and in proper sequence. Coordination neglect can be especially problematic if different teams working on the same project are competing for resources, as they often do.

How to correct, or at least adjust, for the planning fallacy and related human behaviors? The podcast suggests “reference class forecasting.” This is a fancy term for the fairly simple concept of comparing plan (i.e., the new project) to actual (i.e., a comparable previous project). How did you do in terms of time, costs, and promised benefits on your most recent project? If it took 25% longer than proposed, reference class forecasting says to add 25% to the new estimate.

This is not an easy discipline, of course. It can be difficult to identify “comparable” previous projects. Strategic misrepresentation can mean that people who try to be honest about their new projects will lose out to those who aren’t (or maybe the latter simply hasn’t completed a comparable project before). But some jurisdictions, including the UK and Denmark according to the podcast, have built reference class forecasting into their process for approving large (i.e., multi-billion dollar) projects. They also include incentives in contracts that provide rewards if projects actually come in at or below time and budget, and punishments if they don’t.

What’s the relevance of all of this for personal finance? One obvious connection is budgeting. Since how much you spend has an enormous impact on how long your accumulated funds will last over your lifetime, PPA encourages clients to keep budgets and compare them to actuals at the end of the period.

The long-term planning illustrations we prepare for clients also have built-in reference class forecasting components. We show each year of a projection, which allows us to compare with annual actuals to see how that impacts the long-term trends. This allows us to work with clients to make any appropriate changes.

Finally, PPA’s quarterly reporting always compares actual results against a blended market benchmark that reflects each client’s actual asset allocation. Without this comparison, there’s no way to know whether you’re really doing well in good years (did the benchmark do better?) or poorly in bad years (maybe your result was less negative than the benchmark).

I highly recommend listening to the full podcast, and hope you’ll share with us some of your stories about dealing with the planning fallacy and how you have (or at least tried to) overcome it.

We wanted to share an update on the ongoing debt ceiling negotiations. The most up-to-date reports are that President Biden’s White House and the Republican House leadership appear to be moving closer toward an agreement.

As reported by the New York Times this morning, the two sides look to be coalescing around “a deal that would raise the debt limit for two years while imposing strict caps on discretionary spending not related to the military or veterans for the same period. Officials were racing to cement an agreement in time to avert a federal default that is projected in just one week.”

We at Park Piedmont of course do not know and would not predict the outcome of these negotiations. We are aware that the federal government and a wide range of private sector businesses and industry groups are preparing for a range of possible outcomes, with the goal of minimizing the potential damage that could result from a default.

As the ongoing negotiations assume more of the media spotlight over the long Memorial Day weekend, we thought it made sense to share again what we wrote on this topic three weeks ago, back on May 5.

We believe it’s appropriate to emphasize two key takeaways from that essay:

1. Market uncertainty and volatility can be unnerving. But market timing is not an effective investing strategy. Acting on short-term fears tends to defeat the benefits of long-term investing.
2. In the face of uncertainty, diversification continues to be a primary risk management tool. While diversification through asset allocation cannot insulate investors from all risk, it is an important means to cushion market volatility and help all of us withstand the lures of short-term decision-making.

What the Debt Limit Might Mean for Investors

The subject of the United States debt limit has been in the news, and we want to discuss both what it is and what it might mean for you as investors.

What is the debt limit?

The United States has for many years maintained a debt limit, which provides a ceiling for how much money the federal government can borrow to pay what it owes. (Note that the debt at issue refers to current and past expenses already approved by Congress; it does not consist of any new spending in the future.) The U.S. actually reached that limit back in January, but the government – specially, the Department of the Treasury – has taken some “extraordinary measures” to extend the debt limit’s deadline.

As best we know (or the U.S. government knows), the current limit will last through at least early June, at which point, unless and until Congress raises or pauses the debt limit, the U.S. won’t have the cash on hand to pay all its obligations.

You may be asking yourself, haven’t we been here before? The answer is yes.

Over the years, Congress has increased the debt limit many times, typically without any political fanfare. That hasn’t always been the case, though:  for example, back in 2011, Congress increased the government’s borrowing capacity right before it nearly hit its borrowing limit. As a result, the credit rating agency Standard & Poor’s downgraded the country’s credit rating (from AAA to AA+), citing among other things the “political brinkmanship” resolved only at the final hour.

What might the debt limit mean for the economy?

If Congress does not reach agreement on increasing the debt limit, the result would be an unprecedented U.S. debt default. There is a broad consensus that the economic impact would be negative, perhaps significantly so – in the form of higher financing costs, debt downgrades, greater market volatility, and likely other impacts no one can foresee.

“There is an enormous amount of uncertainty surrounding the damage the U.S. economy will incur if the U.S. government is unable to pay all its bills—it depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of U.S. Treasuries.

“An extended impasse is likely to cause significant damage to the U.S. economy. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained—and completely avoidable—damage” (Brookings, 4/24/23).

What might the debt limit mean for investors?

The current political debate over the debt limit is not new. Such contentious debates have occurred over time and are very likely to recur in the years to come.

An important truth to remember is that markets are extremely efficient at digesting information. Today’s prices reflect both what is known and what market participants believe may happen in the future. So the continuing uncertainty of a looming debt default is largely if not fully already priced into financial markets.

Further, “country debt is generally a slow-moving variable. Market participants can have well-formed expectations about future debt levels and effects on publicly traded securities, expectations that should be reflected in current market prices” (Dimensional Fund Advisors, 12/6/21).

From Park Piedmont’s perspective, we feel it’s important to remind our readers that there is always going to be uncertainty, risk, and opportunity – in the world and in the financial markets. For our clients, we recommend a return to your first principles: your goals, your time horizon, and your risk tolerance.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Grim headlines and warnings of uncertainty and short-term volatility may set off alarm bells in your brain, shouting, “Do something! Anything!”

At those times – particularly at those times – it is important to maintain a focus on your important priorities, and especially to pay attention to your relevant timeline.

There is ample data that market timing is not an effective strategy. Remember that successful market timing requires that you get the timing right twice:  when to get out of the market, and when to get back in. Negative downturns and market volatility are undoubtedly disconcerting. But giving way to short-term feelings tends to defeat the benefits of long-term investing.

“The initial upsurge in prices from their lows often takes many investors by surprise, and they find it extraordinarily difficult to buy stocks that were available at sharply lower prices a few weeks earlier. … Add to this the likelihood of increased transaction costs and the potential tax consequences of a short-term trading strategy, and the odds of adding value through market timing grow even slimmer” (Dimensional Fund Advisors, 2/23/22).

Finally, and perhaps most importantly, we return to the importance of asset allocation and diversification. In the words of Nobel laureate Merton Miller, “Diversification is your buddy.”

The choice of investments and the allocation to different asset classes in your investment portfolio should be based on each investor’s risk tolerance and goals. It should not be influenced by trying to predict the direction of future price changes for these investments, or by reacting to actual price changes by selling the investments that are declining (or, on the flip side, buying investments that have experienced recent gains).

While diversification through asset allocation cannot insulate investors from all risk, it is an important tool to cushion market volatility and help all of us withstand the lures of short-term decision-making.

If you have any questions or concerns – about the debt limit deliberations or any other topics – please reach out to your Park Piedmont advisor. We are here to be a resource and sounding board and are happy to talk.

In today’s digital age, cybersecurity has become a major concern for individuals and businesses alike. With the increasing prevalence of cyberattacks, it’s more important than ever to know cybersecurity best practices to protect ourselves and our data.

So, how can we best do that?

We think about this question frequently at Park Piedmont. We take cybersecurity seriously, and we’re continuously educating ourselves on best practices to protect our client data.

With that in mind, we recently attended a cybersecurity webinar hosted by Schwab. We took away a lot of helpful information, and we wanted to share what we learned with you.

Create Unique Passwords

One of the most important steps you can take to protect yourself from cyber threats is to use strong passwords.

An ideal password should be unique and at least 12-15 characters long. It’s important to avoid using the same password; otherwise, hackers only need to crack one password to gain access to multiple accounts.

As important as it is to use unique passwords, keeping track of them can be a challenge. Fortunately, there are password manager apps that can generate and store unique passwords for you, and many of them offer free levels of service.

Here are a few options to consider:

• 1Password
• LastPass
• Bitwarden
• Dashlane
• NordPass
• Keeper

These are only a few of the many options available. It’s important to do your own research so that you can choose the best password manager app for your needs.

You can also add an extra layer of security to your accounts by using multi-factor authentication, such as a fingerprint or a one-time passcode sent to your phone.

Update Your Technology

Another step you can take to protect yourself is to ensure that your software and operating systems are up to date.

Software updates contain important security patches that can prevent cyber hackers from exploiting vulnerabilities. Your device will let you know whenever a software update is available, and you should take immediate action when you receive those alerts.

In addition to staying on top of the updates, you will also want to use antivirus software for PCs, such as Bitdefender Antivirus Plus, Norton AntiVirus Plus, or McAfee Total Protection.

Beware Phishing Attempts

Phishing emails are on the rise, as you’ve likely noticed in the past couple of years. Before you click on a link or download an attachment, verify that the email is coming from a familiar sender.

In addition to checking the sender’s name, be sure to verify the email address itself. For example, we recently received an odd email from “Amazon” stating that we needed to review our billing information by clicking on the link below.

Upon further review, however, we noticed that the email address was not from @amazon.com but instead from an obscure email address.

Be Vigilant

The last thing we want to mention is simply to be vigilant. Monitor your accounts regularly and act immediately if you notice any suspicious activity.

If a data breach should occur, Charles Schwab provides step-by-step instructions to minimize the impact. And, of course, contact us right away so we can assist you with any accounts managed by Park Piedmont.

—

Read “Cybersecurity Best Practices to Protect Your Accounts” in the Piedmont Exedra.

The subject of the United States debt limit has been in the news, and we want to discuss both what it is and what it might mean for you as investors.

What is the debt limit?

The United States has for many years maintained a debt limit, which provides a ceiling for how much money the federal government can borrow to pay what it owes. (Note that the debt at issue refers to current and past expenses already approved by Congress; it does not consist of any new spending in the future.)

The U.S. actually reached that limit back in January, but the government – specially, the Department of the Treasury – has taken some “extraordinary measures” to extend the debt limit’s deadline.

As best we know (or the U.S. government knows), the current limit will last through at least early June, at which point, unless and until Congress raises or pauses the debt limit, the U.S. won’t have the cash on hand to pay all its obligations.

You may be asking yourself, haven’t we been here before? The answer is yes.

Over the years, Congress has increased the debt limit many times, typically without any political fanfare. That hasn’t always been the case, though.

For example, back in 2011, Congress increased the government’s borrowing capacity right before it nearly hit its borrowing limit. As a result, the credit rating agency Standard & Poor’s downgraded the country’s credit rating (from AAA to AA+), citing among other things the “political brinkmanship” resolved only at the final hour.

What the debt limit might mean for the economy

If Congress does not reach agreement on increasing the debt limit, the result would be an unprecedented U.S. debt default. There is a broad consensus that the economic impact would be negative, perhaps significantly so – in the form of higher financing costs, debt downgrades, greater market volatility, and likely other impacts no one can foresee.

“There is an enormous amount of uncertainty surrounding the damage the U.S. economy will incur if the U.S. government is unable to pay all its bills—it depends on how long the situation lasts, how it is managed, and the extent to which investors alter their views about the safety of U.S. Treasuries.

“An extended impasse is likely to cause significant damage to the U.S. economy. Even in a best-case scenario where the impasse is short-lived, the economy is likely to suffer sustained—and completely avoidable—damage” (Brookings, 4/24/23).

What the debt limit might mean for investors

The current political debate over the debt limit is not new. Such contentious debates have occurred over time and are very likely to recur in the years to come.

An important truth to remember is that markets are extremely efficient at digesting information. Today’s prices reflect both what is known and what market participants believe may happen in the future. So the continuing uncertainty of a looming debt default is largely if not fully already priced into financial markets.

Further, “country debt is generally a slow-moving variable. Market participants can have well-formed expectations about future debt levels and effects on publicly traded securities, expectations that should be reflected in current market prices” (Dimensional Fund Advisors, 12/6/21).

From Park Piedmont’s perspective, we feel it’s important to remind our readers that there is always going to be uncertainty, risk, and opportunity – in the world and in the financial markets. For our clients, we recommend a return to your first principles: your goals, your time horizon, and your risk tolerance.

When the unexpected happens, many investors feel like they should be doing something with their portfolios. Grim headlines and warnings of uncertainty and short-term volatility may set off alarm bells in your brain, shouting, “Do something! Anything!”

At those times – particularly at those times – it is important to maintain a focus on your important priorities, and especially to pay attention to your relevant timeline.

There is ample data that market timing is not an effective strategy. Remember that successful market timing requires that you get the timing right twice:  when to get out of the market, and when to get back in.

Negative downturns and market volatility are undoubtedly disconcerting. But giving way to short-term feelings tends to defeat the benefits of long-term investing.

“The initial upsurge in prices from their lows often takes many investors by surprise, and they find it extraordinarily difficult to buy stocks that were available at sharply lower prices a few weeks earlier. … Add to this the likelihood of increased transaction costs and the potential tax consequences of a short-term trading strategy, and the odds of adding value through market timing grow even slimmer” (Dimensional Fund Advisors, 2/23/22).

Finally, and perhaps most importantly, we return to the importance of asset allocation and diversification. In the words of Nobel laureate Merton Miller, “Diversification is your buddy.”

The choice of investments and the allocation to different asset classes in your investment portfolio should be based on each investor’s risk tolerance and goals.

It should not be influenced by trying to predict the direction of future price changes for these investments, or by reacting to actual price changes by selling the investments that are declining. Or, on the flip side, by buying investments that have experienced recent gains.

While diversification through asset allocation cannot insulate investors from all risk, it is an important tool to cushion market volatility and help all of us withstand the lures of short-term decision-making.

If you have any questions or concerns – about the debt limit deliberations or any other topics – please reach out to your Park Piedmont advisor. We are here to be a resource and sounding board and are happy to talk.

—

Read “What the Debt Limit Might Mean for Investors” in the Piedmont Exedra.