Navigating the Debt Dilemma: Strategies for Investors in Uncertain Times

As the 2024 presidential election approaches, investors are understandably concerned about the potential impact on their portfolios. However, financial advisors suggest that the growing national debt may pose a more pressing challenge, according to a recent survey. This article explores the strategies investors can employ to mitigate the risks associated with the country's fiscal landscape, regardless of the election's outcome.

Empowering Investors to Overcome Debt Challenges

The Looming Debt Crisis: A Pressing Concern for Advisors

The Natixis Investment Managers survey of 2,700 financial advisors across 20 countries, including 300 in the U.S., reveals a striking consensus. Sixty-eight percent of U.S. advisors and 64% of advisors worldwide consider public debt to be the top economic risk, outweighing concerns about the presidential election. This sentiment reflects the advisors' belief that the national debt, currently exceeding trillion, will continue to rise regardless of who occupies the White House.The incoming administration and Congress will inherit a complex fiscal landscape, including the looming depletion of trust funds for Social Security and Medicare. As a result, more individuals are recognizing the need to take a more active role in funding their own retirements, according to the Natixis survey.

Diversifying to Mitigate Volatility Risks

Financial experts emphasize that while investors cannot control the actions of policymakers, they can take proactive steps to manage their exposure to broader economic risks. One key strategy is to maintain a well-diversified portfolio."Right now, in particular, you need some sort of risk offset in your portfolio, something that is non-correlated to stocks," said Dave Goodsell, executive director of the Natixis Center for Investor Insight. As the equity market reaches new all-time highs, investors have heightened their expectations for returns, with the Natixis research finding that investors expect returns of 15.6% above inflation, while professionals suggest a more realistic target of 7.1% above inflation.To balance these risks, financial advisors recommend incorporating both U.S. and international bonds into investment portfolios. Longer-duration bonds tend to carry higher risks, so investors should carefully consider their risk tolerance and time horizons. Additionally, adding international exposure can help mitigate the potential impact of slow domestic growth due to the debt burden.

Optimizing Tax Strategies for Uncertain Times

The rising national debt also raises concerns about potential tax increases in the future. To prepare for this eventuality, financial planners suggest diversifying investment accounts to include a mix of tax-deferred, tax-free, and taxable options.Roth individual retirement accounts (IRAs) and 401(k) plans allow investors to contribute post-tax money, which can provide tax-free withdrawals in retirement. Leveraging other tax-advantaged accounts, such as 529 college savings plans or health savings accounts (HSAs), can also help investors manage their tax exposure on qualified expenses."We can't forecast what tax rates will be in the future," said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth. "Having money in a mix of tax-deferred, tax-free and taxable accounts can be helpful, because it gives investors flexibility to limit their taxable withdrawals."

Reducing Personal Debt Burdens

While the national debt is a significant concern, individual consumers have also been grappling with rising personal debt levels. Financial advisors emphasize the importance of managing these debts proactively."The sheer amount of debt that is outstanding that is charging more than 10% per year is shocking," said Barry Glassman, a certified financial planner and the founder and president of Glassman Wealth Services.To mitigate the impact of personal debt, experts recommend maintaining good credit, which can help secure better interest rates on loans and even lower insurance premiums. Additionally, prioritizing the repayment of high-interest debts can significantly reduce the overall cost of borrowing.By taking a holistic approach to managing their finances, investors can navigate the uncertain landscape of rising national debt and prepare for the potential challenges that may arise, regardless of the outcome of the upcoming presidential election.