OK, I get that the US and Europe are having a rough time of it. Yes, we have a ton of debt. Yes, our politicians are being, well, politicians. Yes, something needs be done about it. And yes, American’s debt rating just got downgraded by S&P. But…seriously, what is up with investors? From the way the market tanked today, this is the scene that’s playing out in my head:
Panicked Rich Guy: “Did you hear that S&P downgraded the US debt rating?”
Patient Financial Advisor: “Yes, sir, it was kind of hard to miss.”
Rich: “This is terrible! Pull all of my money out of stocks!”
Advisor: “Actually, now that stock prices have already dropped, it’s a bit too–”
Rich: “I’m just thankful they haven’t dropped any further yet! Quick, sell it!”
Advisor: “Sir, I am compelled to remind you that the basic objective of investing is to ‘buy low, sell high’. This is precisely the opposite –”
Rich: “Sell, or I’ll find someone who will!”
Advisor: *sigh* “Very well. And will we be putting that money into your FDIC-insured bank account or into Treasuries?”
Rich: “Oh, either one. As long as it’s safe!”
See what I mean? I keep expecting US bonds — you know, those loans that are supposedly more likely to default now — to tank, or at least decline in price a little bit, but they haven’t; in fact, they’ve gone up! Apparently no one actually thinks the US will default, so everyone’s still holding on to their bonds. Moreover, S&P’s reputation isn’t exactly stellar; yes, the White House has a few choice words for them, but other intelligent folk like Nate Silver also think that the initials should stand for Substandard and Porous.
So given all this…Mr. Stock Market, could you please take a deep breath and relax? You haven’t heard anything you didn’t already know, so please stop panicking as if you had.
(Edit: seems that Morningstar feels the same way.)