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So the S&P has downgraded United States debt from it's AAA status. There have been other threads discussing why/when a downgrade will happen, as well as possibility of default. Instead, I want to know - where do we go from here?

How should the astute investor react? I think it's almost guaranteed that bond yields will increase. This should cause investors to go to bonds and leave the equity market. How should we, as investors, take advantage of this scenario to maximize returns?

I'm not interested in specific equities or predictions about how much the DJIA will fall - I want a plan of attack. What is the investor's ideal response to the downgrade?

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4 Answers 4

up vote 13 down vote accepted

The time to take advantage of this downgrade was BEFORE it happened, not after. Typically responding to an event after the market has already had time to correct for it is a good way to lose money.

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Personally I'm not doing anything; my monthly purchases are occurring as per normal.

This kick in the pants was politically justified - we need to stop impersonating third world nations - but from a credit/financial perspective I doubt it will amount to much. As many commentators said over the past few months, the damage was locked into the market well ahead of the inevitable 11th hour debt-ceiling "decision".

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I don't want my credit rating agency to make decisions political in nature. –  MrChrister Aug 6 '11 at 15:11
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@MrChrister. You believe ratings are apolitical? –  gef05 Aug 6 '11 at 17:06

To mimic that any real action would be too late, I would further offer up that only a single entity downgraded the US, and it is catching a lot of heat for doing so.

I suspect that the S&P people may have hurt their own reputation more than they hurt the US credit rating.

This is my initial reaction is based on this article:

http://robertreich.org/post/8542550924

Maybe I am only person who agrees and my vote is a tiny one, but the point about this being a political issue not a credit worthiness issue is a strong one to me.

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"If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt — or, more accurately, the ratio of debt to GDP — is none of S&P’s business." - but the whole point is that failure to bring down the long term debt makes paying the bills less likely. –  Ganesh Sittampalam Aug 6 '11 at 13:52
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I personally respect Mr. Reich, but I disagree with him. To reduce debt service costs, the government has had a policy of shifting to short and medium term debt for most borrowing and away from long-term, 30 year bonds. On the one hand, this is good -- we pay 2% interest instead of 4.5%. On the other hand, this era of historically low interest rates WILL come to an end, and when it does, it will be a real wake-up call. –  duffbeer703 Aug 6 '11 at 14:33
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Absolutely. I agree we need to tighten up and reduce the debt in the US. I think we need to do things we aren't doing. But those are political problems beyond the scope of the credit rating in my opinion. States are not in the same plan as personal finance, and the US is not in the same plane as other economies. –  MrChrister Aug 6 '11 at 15:05
    
If the credit to debit ratio is none of S&P business - why it is of Experian business? Why what's "good" to establish credit-worthiness of a person is not good to establish the same for the country? The only difference is the politics. So why do you complain about ratings being political? –  littleadv Aug 7 '11 at 7:36
    
@littleadv - personal finance is not the same as gov't finance. Furthermore, the specificity of what the S&P raters think the US should do makes it political. If they said, "fix your debt" it would be one thing, but they say "fix you debt and cut your entitlements" and other specific options. –  MrChrister Aug 8 '11 at 15:44

You need to be calm and wait. If rates do in fact rise, you'll have options.

Hopefully, you have a portion of your portfolio in liquid/cash investments that can be used to take advantage of opportunities as they present themselves.

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