In my view, U.S. Treasuries will remain a virtually risk-free security regardless of what S&P says—making AA+ the new AAA. For one, as the great Warren Buffett has noted, the U.S. “owes no money in currency other than the U.S. dollar, which it can print at will.” That is not true of European countries who are all tied to a common currency—the Euro—which they cannot print. About 45% of our sovereign debt is held abroad by countries such as China and Japan. If those foreign entities agreed with Standard & Poor’s they would abandon Treasuries, which has not happened. The reason being, foreign investors, especially large central banks, have two choices aside from U.S. Treasuries: slim and none. Given the recent market turmoil, European sovereign debt is looking riskier by the minute. Moreover, the BRICs (Brazil, Russia, India, and China) are nowhere near ready to stand in as any sort of global reserve. When taken in a global context, we think foreign investors are now more likely to bulk up on Treasuries than pull back.
So, what does this mean you should do? That’s the simple part: nothing different. I don’t believe the unfortunate downgrade of our great nation should cause you to change your view of the country, its credit, the stock market, or anything else, frankly. In the words of Vanguard founder John Bogle: “Don’t do something, stand there!” You should examine your asset allocation to make sure it remains in line with your long-term goals. Continue to invest as much as you can in your 401(k) or IRAs. If you have cash and agree with me that the stock market is once again cheap, by all means buy prudently. But most of all, do not panic and do not sell just because we dropped half an “A.”
Mellody Hobson is president of Ariel Investments L.L.C., a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds. She is also a regular contributor to ABC’s Good Morning America.