Protecting your investments during the debt ceiling debate

 by Jim Sloan

The Congressional debate over the debt ceiling may have been resolved by the time you read this. But the dire warnings about how a loan default would affect the United States and those of us who make investments in the U.S. are still ringing in our ears.

When you are carrying a $14.3 trillion debt that is only getting larger, even when you're a country as rich as the U.S., people have got to wonder about your ability to pay your bills. And when your politicians seem willing to play chicken with your country's credit rating and global financial reputation, doubts about your financial future grow deeper.

So the question that lingers is this: How will those of us with retirement savings accounts, mortgages, money market accounts and other investments be affected by this ongoing debt crisis?

Unfortunately, there are no definitive answers. While people like Wall Street analyst Dick Bove recommended that people get liquid and stop making stock market investments altogether, other fiscal experts were telling NPR and other media outlets to stay the course. When average investors try to anticipate what the stock market or interest rates will do, they usually guess wrong and wind up losing more than if they'd stayed pat.

That said, here are some ways the debt debate and prospects for default could affect you:

Interest rates on mortgages go up

According to CBS News, interest rates on a 30-year fixed mortgage could go up as much as 2 percentage points from 4.5 percent if the U.S. defaults. Adjustable rate mortgages owned by 15 million U.S. homeowners could also increase.

Other estimates were that interest rates on mortgages could rise a half point, meaning the average home loan of $172,000 could increase nearly $20,000.

401(k) retirement savings accounts decrease in value

A 10 percent drop in the stock market means the average 401(k) savings account of $140,000 could lose about $9,000, NPR said. Investors can avoid these potential losses by taking Bove's advice, but experts told NPR that people with diversified portfolios with a mix of growth stocks and conservative investments should be able to weather this blip.

According to Forbes.com, those who get out of the stock market to cut their losses don't do as well as those who stay the course. For instance, those who stayed in the market from 1988 to 2008 earned an annual return of 8.43 percent while those who pulled out of stocks and missed key market upticks came away with 0.59 percent annual growth.

Putting a halt to savings

So if these repercussions don't sound that dire, why are politicians making it sound like the U.S. is on the brink of financial disaster?

According to the Chicago Tribune, that's just politicians using negotiating tactics; those who can dream up the most outlandish consequences gain an upper hand in the negotiations.

What seems lost on politicians is the fact that all this uncertainty is causing more anxiety and expense than a simple tax hike would. According to the Washington Post, many executives--the job creators the Republicans purport to protect--said they could tolerate a tax hike if it were part of a clear, predictable fiscal policy.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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