Camping at the edge of the Fiscal Cliff
“I’m off to sit on a cliff.”
— Nick Kershaw
I have spoken with many investors over the last few weeks regarding the presidential election and the potential impact the results could have on their life goals and investment portfolios. What was once unknown is now known. What before was unclear is now clear. One week after our national election we have a president and Congress that is effectively unchanged, a looming deadline to address the U.S. fiscal cliff, immense pressure to raise the National Debt Limit in early 2013 and world markets swimming in a sea of confusion and uncertainty.
The markets do not like uncertainty, made clear by the strong negative reaction of the U.S. stock market since the election. Additionally, it is clear that the election was only the beginning, not the end. It feels like the beginning of a long, cold fiscal winter. Our leaders meet this week to begin to find a resolution to the “fiscal cliff,” when $607 billion of tax cuts expire and automatic government spending cuts kick in. The impact on the stock market is simple. The longer it takes for our leaders to resolve the issue, the further the market will fall. Even if they find a Band-Aid fix, the compromise could have a negative impact on the financial markets as well. Based on our government leaders’ recent inability to work together and solve problems, it looks as though we could be in this financial wilderness until the spring. Here is a basic survival guide for camping at the edge of the fiscal cliff.
1. Grab a tax planning blanket to insulate your gains from the certain tax hikes. While the compromise to deal with the fiscal cliff remains unknown, it is highly likely that capital gains and dividend taxes will be increased. If this is true, it means that stock you sell on Dec. 31 will be worth more after tax, than the same stock sold on Jan. 1. Now may be a good time to meet with your financial team and consider cashing out your winning stocks, especially if you are a high income earner and hold dividend paying stocks.
2. Make sure your portfolio is more flexible than a Swiss Army Knife. This may be the most critical time in the last decade to have a properly managed and diversified portfolio. The traditional mixing of only domestic stocks and bonds will leave you at risk and frustrated. Adding alternatives such as real estate and commodities are virtually mandatory for reducing risk and finding growth opportunities in today’s economic environment.
3. Be sure you have a good first aid kit to soothe your pain for medical costs. With Obama’s health care reform now moving forward, your employer is likely to surprise you during open enrollment this year — brace yourself. Already high premiums will be rising, according to a survey from the National Business Group on Health. Employers are expecting health care costs to increase 7 percent and plan to ask their employees to pay higher monthly insurance premiums.
4. Bring your binoculars … the fiscal cliff compromise could impact your children. While it is not discussed often in the media, it is likely that the federal estate tax exclusion, now set at $5 million, will also be used as a negotiation tool. Based on the administration’s temperament toward wealth, this tax could be at risk of rolling back to $1 million exclusion. This will put a tremendous tax burden on your right to transfer your wealth to your heirs.
While I am not suggesting we all go out and build bunkers to hold our gold and guns, it is time to be prudent, reduce risk and stay flexible.
RC Arseneau is a Certified Financial Planner and lives with his family in Delaware. Please submit any questions or topic requests to AskRc@mail.com.
The information and opinions in this column are provided only for educational and entertainment purposes. Any reference to a financial product or strategy is not to be considered an endorsement or recommendation. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional financial, legal or tax advice. Investment Performance may vary due to timing and expenses. Rc recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.