(Corrects spelling of Tom Atteberry's name in 20th paragraph.)
By Lauren Young
NEW YORK Oct 11 What should investors do if
they think their portfolio is facing doomsday?
It's a question more folks have been asking me as the United
States grapples with the prospects of debt default. On Oct. 17
the U.S. Treasury will need authority to sell more debt
securities - or face defaulting on its obligations. Another key
date: Nov. 1. That's when more than $55 billion in federal
payments come due - and the Treasury might not have enough to
cover those bills.
Even as lawmakers consider short-term funding measures,
every day that the government is partially shuttered and
Congress and the president remain at an impasse is
angst-inducing. Roughly one-quarter of individual investors have
either increased their cash positions or postponed buying
stocks, according to a recent poll by the American Association
of Individual Investors.
In the past week, I've canvassed more than 20 money
managers, strategists and financial advisers about the
probability of a default. Collectively, they manage hundreds of
billions of dollars. None of them predict an Armageddon for
investors. And yet ... their anxiety level is amping up, even
with the market's rally on Thursday.
"As an investment professional, do I think we go through a
default? No," says Stephen Sachs, head of capital markets at
ProShares, which offers exchange-traded funds that allow
investors to double down on the markets. "But I don't assign a
zero probability to it."
Adds Bruce Baughman, a veteran value investor at Franklin
Templeton: "I'm no Chicken Little, but even I am starting to get
Few experts foresaw the breadth and depth of the 2008
financial crisis. Since then, though, we've all learned to
expect the unexpected. It's entirely possible that a U.S.
default could trigger an unprecedented global financial
If that isn't scary enough, here is even more bad news:
Investors have few places to hide. That's because during
cataclysmic markets, even hideouts like "cash," including
really-short-term bonds and gold, suffer as well.
Yet there are a few ways to rejigger your holdings and hedge
your bets. Some of these moves are exceptionally risky, so
proceed with caution.
BET AGAINST THE BOND MARKET
If the U.S. defaults on its debt, the biggest portfolio
blow-ups should happen within the market. Yields on bonds -
particularly U.S. Treasuries - could rise sharply, and prices
could fall just as fast.
That's where inverse exchange-traded funds come into play.
These high-octane funds short the market - moving in the
opposite direction of major benchmarks, like the Barclays
Capital 20+ Year U.S. Treasury Bond Index. Some inverse ETFs
have extra juice - seeking to deliver double the inverse
performance of the corresponding benchmark.
"If the U.S. defaults, the gains on these shorts would be
astronomical," says Cliff Caplan, a wealth manager at Neponset
Valley Financial Partners in Norwood, Massachusetts. He
recommends buying the ProShares UltraShort 20+ Year Treasury ETF
if you expect the United States to default on its debt.
The ETF, which has an expense ratio of 0.93 percent of assets,
is up 21.09 percent so far this year through Oct. 9. That's
compared to a 1.94 percent drop for the Barclays U.S. Aggregate
Bond Total Return Index, which is a proxy for the U.S. bond
market, according to Lipper, a unit of Thomson Reuters.
Another popular option to bet against bonds is ProShares
UltraShort 7-10 Treasury ETF. Year to date, it is up
6.85 percent. The fund charges 0.95 percent for annual expenses.
"Caveat emptor," warns Tom Roseen, head of research services
at Lipper, who says these volatile funds are not ideal for
Indeed, Caplan bought an inverse bond ETF in 2011 ahead of
the ratings downgrade on U.S. debt by Standard & Poor's. "I
didn't put a lot of money in it, but percentage-wise it was a
disaster because interest rates went down, not up," he says.
FOCUS ON SHORT-TERM DEBT
Short-term debt isn't as sensitive to interest-rate moves as
That's why Jessica Ness, director of financial planning at
Glassman Wealth Services in McLean, Virginia, recommends
ultra-short-term bond funds, including FPA New Income.
It is up 0.38 percent for the year, according to Lipper.
The fund gets high marks from Lipper for capital
preservation. (FPA's motto: "We don't like to lose money!")
The disclaimer here is that some institutional investors are
dumping short-term debt because of worries that it will be
defaulted on first.
Even so, "our concerns about the bond market remain about
the same," says co-manager Tom Atteberry. Atteberry's team is
focusing on bonds secured by assets that, he says, "are critical
to a business or individual, can be easily valued and can be
foreclosed on in an efficient fashion in the event of default
and the owner has equity invested along side us."
Some other bond funds Ness recommends: Franklin Adjustable
U.S. Government Securities, which has an expense ratio
of 0.62 percent, and Driehaus Select Credit. Both
funds are essentially flat for the year.
Gold is considered to be the place to hide in the event of a
market meltdown. Lately, it hasn't looked especially safe - the
price per ounce of the precious metal has fallen about 22
percent this year. And during the last financial crisis it lost
"For doomsday clients, I typically recommend that they buy
some gold - not in their portfolio as an investment, but rather
as an insurance policy," says Carl Amos Johnson, a financial
adviser at Ames Planning Associates in Peterborough, New
The easiest way to invest in gold is to buy the SPDR Gold
Shares ETF. It is backed by a stash of gold bullion held
in a vault in London.
Johnson's advice, however, is to buy physical gold coins and
keep them handy. Stash them in the treasure chest in your bunker
- along with the batteries and canned goods.
(Reporting By Lauren Young. Editing by Linda Stern and Douglas