Government Shutdown Sparks Market Jitters -- Should Investors Turn to Gold and Other Alternatives?

Key Points

• The U.S. government is in the midst of a "shutdown" as lawmakers fail to reach agreement.
• But the government isn't fully shut down, and the effects of this event are likely to be short-lived.
• Don't dump your long-term investment plan, but owning some gold or crypto isn't necessarily bad.
• These 10 stocks could mint the next wave of millionaires ›

The media headlines are screaming that "the government is shut down!" But that's not entirely true. Essential services are still being provided, and there's no expectation that they will stop even if the shutdown drags on.

Here's why the shutdown isn't a great reason to dump your long-term investment plan and buy gold or other alternative investments, like crypto. However, owning some of those investments might not be such a bad idea if you think long term.

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How "shut down" is the U.S. government?

Prior to the shutdown, the Social Security Administration (SSA) created a contingency plan. The SSA employs 51,825 people. In the event of a shutdown, the SSA intended to furlough just 6,197, leaving it with 45,628 employees still working on making sure Social Security checks get mailed each month. That is far from being completely shut down.

Image source: Getty Images.

Yes, many government jobs will be affected, and some employees will have to temporarily work without pay (they'll get retroactive pay when the budget impasse is resolved). But, for the most part, this isn't going to materially affect most peoples' lives, even though the media is covering the issue non-stop.

In fact, the worst U.S. government shutdown in history lasted 35 days. That's about one month. You shouldn't make long-term investment decisions based on events that are probably only going to be an issue for a single month. The shutdown just isn't likely to be a long-term problem. So buying gold or some other alternative asset to "protect yourself" from this specific event could turn out to be a mistake.

There is a value to gold and alternatives

Look at the S&P 500 chart below, which starts in 1974, when the Congressional Budget Act was passed and government shutdowns became a thing. The S&P 500 has continued heading steadily higher over time, despite government shutdowns. That's one reason why materially changing your portfolio because of a shutdown is probably a bad idea.

^SPX data by YCharts.

But there's another factor to examine as well. The S&P 500 index has not headed uniformly higher. It has gone through periods of good and bad performance, as it always has. These bull and bear market swings are normal, but they can be hard to live through. That's why long-term investors often focus on crafting diversified portfolios.

The goal of having a diversified portfolio is to have exposure to investments that perform differently at different times. The end result is, usually, more consistent performance over time. One of the ways investors try to protect themselves from bear markets is to include a small percentage of "safe haven" assets in their portfolios. These are investments that people turn to if they are worried about the economy or stocks, in a general sense.

Gold is historically seen as a safe haven asset because it is believed to have intrinsic value. You can invest in gold in different ways, including gold bullion, gold miners, and gold exchange-traded funds (ETFs). Having a small percentage of gold -- say, 5% to 10% -- in your portfolio on an ongoing basis wouldn't be a bad thing.

You could make a similar argument about cryptocurrencies. However, they are relatively new assets and don't have the same track record as gold as an alternative asset. In fact, crypto only has value because crypto owners believe it has value. That could change in a really bad market environment. Only more aggressive investors, and true believers in crypto, should own crypto. And, like gold, it should probably only be a small percentage of an otherwise diversified portfolio.

Think this decision through -- don't do it because of the shutdown

Given the history of government shutdowns, you probably shouldn't make any large portfolio changes because of the current shutdown. Don't rush out and buy gold, crypto, or some other safe haven asset. However, that doesn't mean that such investments don't have a potential place in your portfolio.

If the shutdown has you thinking about alternative assets, that's not a bad thing. Just don't make a rash, short-term investment decision here. Think through the logic of investing in alternative assets, and make sure that such a decision really makes sense for you from a long-term perspective. If it does, ease into the changes you want to make over time.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.