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.

Posted by RC Arseneau on Nov 13 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.