Budget issues in Washington over the past few days may have you concerned about their effects on the markets and on your portfolio. It’s natural to feel uneasy about the situation, especially since it’s difficult to pick up a paper or your smartphone without seeing some unpleasant news about it. However, if past experience is any indication, the market impact could be fairly minor.
Here are some highlights from a recent analysis by Vanguard:
||In 2011, when the government narrowly averted a shutdown during another budget impasse, the stock and bond markets regained the ground they’d lost because of the situation by the end of the year.|
||In 1995 and 1996, when the government did shut down due to differences between political parties, the markets were “defiant,” said Roger Aliaga-Díaz, a senior economist with Vanguard Investment Strategy Group. In fact, he said, “broad equity and bond prices rose against the pessimism” during those periods.|
The ongoing debate over the federal debt ceiling may also be on your mind. History can help add perspective here as well. Our analysis also showed that, in 2012, when the debt-ceiling debate ran to the last minute, markets rallied once lawmakers reached an agreement. Because “the impact on the economy from such a dysfunctional political outcome would be unthinkable,” as Mr. Aliaga-Díaz said in the analysis, Vanguard believes all parties involved have a strong incentive to reach agreement.
While past performance is no guarantee of the future, it helps to stay focused on the long term. Having a strategic asset allocation—one built with your investment goals, risk preferences, and time horizon in mind—that factors in tax efficiency is more important than ever. If your goals and time horizon remain unchanged, it makes sense to screen out the noise of recent events and stick with your investment plan.