Lots of people, naturally, are wondering how they should play this week’s debt ceiling crisis as a matter of investments. Sell everything? Buy everything? Buy something? Credit default swaps maybe?
The advice you need to know comes from today’s Nobel Prize winners Eugene Fama and Robert Shiller. And the advice is: Don’t do anything. Financial markets are generally really good at pricing all the relevant information much faster than you can (Fama), and a large class of important deviations from strict efficient financial markets theory consists of emotion-driven overreactions and herding behaviors (Shiller). One very typical investment error is to wait until something terrible happens and the market crashes, and then investors turn sour on stocks and sell low. Don’t do that. If you can’t stomach the thought of owning financial assets that sometimes crash rapidly for reasons that seem unrelated to the long-term health of the American economy, then you just shouldn’t be owning stocks at all.
The good news is that, even though there are a lot of lousy investment products out there, there are also some good ones. Look for a low-fee, diversified life-cycle fund that will keep your money in a mix of stocks and bonds, and try not to think too closely about its ups and downs. The goal is to save some money each and every month and then have that money decades later.
This is all especially true because I think the odds remain good that this will all get resolved Wednesday afternoon by John Boehner agreeing to a Hastert Rule violation that lets a debt ceiling increase pass the House. He clearly doesn’t want to do that, but adherence to a caucus rule of procedure would be a really dumb reason to default, and my best guess is it won’t happen.