31 Aug 2012 Avoid the Market Hype of the Fiscal Cliff

The other day a friend told me that his advisor was encouraging him to sell all of his investment assets to steer clear of the impending “fiscal cliff.” The ‘cliff’ refers to dire financial consequences should our Congress fail to act on certain measures before the new year, any one of which has the potential to derail our economy. They include $1.3 trillion in automatic government spending cuts (most aimed at defense, arguably the more productive part of government spending) set by Congress as a failsafe measure should they be unable to cut spending through their normal legislative processes. The Bush tax cuts are set to expire this year unless Congress reinstates once again. A slow economy is an awful time to raise taxes. Additionally, significant tax and fee increases are set to begin next year, particularly aimed at investors as part of Obama-care. Further impeding the flow of capital investment through higher taxes and fees, again is the wrong thing to do during a slow economy.

The advisor is not alone in his advice. There are countless ads on TV and radio recommending similar sell-out strategies, replacing the assets with the promise of security provided by gold, precious metals and other more complicated strategies. Should you listen to or ignore their appeals?

If the capital markets represent the collective wisdom of all global investors at any time, then surely the perils of the fiscal cliff are not lost. The product selling ‘advisors’ aren’t offering anything the markets don’t already know, and their fear-based tactics undermine their credibility further. Some might argue that the markets haven’t fully discounted the advancing perils, but that logic implies a certain knowledge of the future – that the worst will be realized?

Selling some or all of your investments to avoid perceived threats requires that you  be right about the future not once, but twice. The timing of your exit should be accurate to avoid missing any additional rise in the markets and your eventual return to the stock market must be well-timed to avoid opportunity costs of missing the run that ensues. Without a crystal ball, you must guess right twice.

Further, by demonstrating a proclivity toward timing the turns of markets, as a strategy to be repeated over your investing career, accuracy in your predictions will be all the more important as the odds of success stack up incredibly against you. Your strategy will require that you also sufficiently offset the guaranteed losses from taxes and expenses.

I don’t mean to minimize the financial threats we face today in any way. They are real and they represent the possibility of significant volatility in the coming months. But there is a better way to address the uncertainty of markets and your future than guessing or paying advisors to guess for you.

Turn the process around. Instead of chasing an uncertain and unknowable future in your investment program, measure the uncertainty that exists in your plan and take the steps necessary to ensure confidence of meeting and exceeding your goals.

By modeling the historical behavior of the capital markets and adding statistically possible behaviors (good and bad), the uncertainty inherent in a financial plan can be measured. By manipulating levels of savings, the timing of goals, the amount of risk in the portfolio, estate values, and other valuables, we can design an optimal plan that provides balance between ensuring adequate confidence that our client will meet or exceed each goal he or she values while offering the best possible lifestyle.

Rather than waiting to see how your guesses work out, you productively plan a life that you want to live, both now and later. We help you make adjustments as required to maintain sufficient confidence as well as take advantage of opportunities that otherwise might come and go without notice.

The fiscal cliff represents a clear and present danger for America’s economy. But the potential market disruptions are already built into our models. Every time we stress test our clients’ plans we virtually ‘live’ our clients’ lives through these and many worse market threats. As a result their portfolios subject them to no more risk than is absolutely necessary to meet their goals. In other words, based on all the markets that have occured since 1926 as well as the potential markets that have not yet occurred, our clients’ plans survive the coming cliff and they go on to meet and exceed the goals they value. We continually monitor to ensure it.