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How to invest amid debt ceiling default deadline

Mitlin Financial Founder Lawrence Sprung joins Yahoo Finance Live to discuss how to invest and plan for a debt ceiling crisis, the 2011 debt ceiling crisis, and how to enter the market during this time.

Video transcript


RACHELLE AKUFFO: The hang up in Washington's debt ceiling negotiations is turning out to be longer than expected. President Biden and House Speaker Kevin McCarthy spoke on Wednesday to continue talks about America's outstanding debt limit. And while there is no deal yet, investors are wondering how to safeguard their finances if the US defaults on its debt. Let's bring in Lawrence Sprung, Mitlin Financial Founder and Wealth Advisor to discuss this. Thank you for joining us. So I first want to ask in terms of the questions that you're getting from people, what are they most concerned about when they're looking at this debt ceiling standoff continuing?


LAWRENCE SPRUNG: Yeah. I mean, I think what they're looking at is how is this going to affect me, right? Because financial planning is very personal and people want to know how is this potentially going to affect me. And we have to-- we really don't have any kind of precedence here in terms of an actual default outside of 1979, which was a clerical error. The only closest indication we have is what happened in 2011 prior to us coming to a deal and actually getting downgraded, which, you know, obviously caused some significant declines, even without a default.

RACHELLE AKUFFO: And so then in the short-term, as we're sort of still in this, this holding pattern of volatility here versus really taking the long-term view, assuming that the US does at some point get this settled here, how should people play this?

LAWRENCE SPRUNG: I think the important thing is if you have a plan in place, follow the plan, because this is going to end up being a short-term event in a long-term situation, right? And two, if you don't have a plan in place, I think that this should encourage you to make sure that you get one and have one, because this may or may not be the last time we see these types of negotiations happen with regard to debt ceiling or even other financial, economic, or market events.

RACHELLE AKUFFO: And so what did we learn from 2011 in terms of perhaps some of the safe havens that people tend to go to and which ones they should actually be heading towards?

LAWRENCE SPRUNG: So I think one of the things we saw was the market had a sell off I think in the S&P about 19%. So there was a significant sell off. That's the bad news. The good news is it recovered rather quickly. So if you're concerned in the short-term, there might be opportunities to flood to some safe havens like, you know, treasuries or money markets in order to secure some of that debt in order to secure some of those declines. But at the same time, if you have a longer-term time horizon, chances are there maybe a short-term impact. But for those who are longer-term, it may also provide a long-term opportunity to enter the market if this were to happen.

RACHELLE AKUFFO: And so for people who did want to enter the market right now, what sort of caution or advice would you give them about how to approach when they're trying to pick, you know, do I look at perhaps ETFs or do I look at, you know, something more broad-based and diversified?

LAWRENCE SPRUNG: Yeah. I think right now if you are looking to enter for the first time or you have some money on the sidelines, I would probably wait, take a wait and hold approach in terms waiting to see how the negotiations go. If we end up in a situation where there is a default, which I still think is very highly unlikely, but if we did and there was a market sell off, that could present an opportunity. I would wait to see how this plays out because it's only-- you know, we're going to probably see a resolution in the next week or so. We'll see if we have a deal in place or if there's a potential for default. So I think that would be a wait and see approach for those looking to enter today would probably be the best and wisest approach.

RACHELLE AKUFFO: And based on what we saw in 2011 then, in terms of how long the volatility lasted or the most affected sectors at first, what should people keep in mind?

LAWRENCE SPRUNG: I think, again, you know, we want to take a long-term approach, you know, if you are an investor. If you're a trader, you might have a much different approach to this whole situation. And you may be taking advantage of what's going on today and not be willing to wait. But if you have a more long-term approach, then having that diversified portfolio-- you know, we always work with folks in designing the most diversified and least expensive way of entering the market and investing their portfolios. So I would do the same way. You know, if you have the opportunity to invest due to a market decline, take that opportunity, diversify, and build yourself a long-term inexpensive portfolio.

RACHELLE AKUFFO: And for people who are sort of close to retirement looking at this volatility and really not sort of wondering what to make of it, how would you advise them versus someone who's sort of just beginning or in the middle of their work life?

LAWRENCE SPRUNG: Obviously, that's a much different scenario. I would argue they have to take a deep breath, and they have to look at what monies they may need in the short-term versus the long-term. Those funds that are more long-term in nature, it will be probably a similar effect to their portfolio in the long-term as it was or would be for a younger investor. For funds that they may need in the short-term, next 6 to 12 months, they should be identifying or maybe getting more liquid than normal in order to have those funds available so that they're not subject to the gyrations of the market due to the debt ceiling negotiations.

RACHELLE AKUFFO: I do appreciate you joining me this morning. Lawrence Sprung, the Mitlin Financial Founder. Thank you so much.