Fiscal Cliff? It's Possible to Scale it and Climb Higher.

Posted by Heidi Clute - October 25, 2012 | Filed under: Archived Articles

There's been talk about the possibility of the U.S. economy "going off a cliff" at the end of this calendar year.

What is this "cliff" pundits are referring to? It's actually a possible culmination of a number of government tax and benefits changes scheduled to impact our economy simultaneously. Specifically, the Bush tax cuts and payroll tax cuts are due to expire (which would impact workers' take home pay) and extended unemployment benefits will also expire (which would eliminate an income source for those out of work.) To further complicate the situation, higher Medicare taxes will take effect and certain government discretionary spending is scheduled to halt.

Adding to the uncertainty are the November elections. There is a great deal of anticipation surrounding the elections this year – but it's what happens after them that will determine what our economic and market landscapes look like in the years to come.

Usually we use the term "market uncertainty" to describe a period of stock market lows, high/rising unemployment and other recessionary patterns. However, this isn't the case now: we're near five-year highs in the stock market (as measured by the S&P 500), unemployment is improving (at a very sluggish rate), and the housing market is on the mend – yet "uncertainty" is still an accurate depiction of where we are because of the elections and the impending tax changes.

No matter which "uncertain" scenario we're facing, the rules don't change: don't panic, remember your goals, and take advantage of opportunities.

Stay calm. The first thing to remember is that market cycles have ups and downs. The best bet for riding out market and economic uncertainty is to do just that: ride it out. If you are an investor, not a trader, you need to give your investments time to grow.

Revisit your goals. We often have periods of economic uncertainty; these periods provide an opportunity to look at your goals with your financial advisor. Do your goals still reflect what you want to accomplish? Are they realistic based on current conditions? Do you need to "tweak" them in order to accommodate changing tax laws?

Taking a realistic look at your current financial state and making appropriate adjustments can help solidify your financial picture in changing times. You can't control the market, or the outcome of fiscal policies, but there are elements of your financial situation that you do have control over. Focusing on what you can control will go a long way to reducing stress.

  1. Review your budget. Look for non-essentials you can eliminate or cut back on, especially if your income has dropped or is at risk.
  2. Look at your cash balances. Do you have enough cash set aside for your short-term needs and goals (1-5 years out) mid-term (5-10 years) long-term (10 years +)? A common guideline is to set aside six months of living expenses for short-term needs and for an emergency fund. If you are changing jobs, or under employed, consider setting aside a full year of living expenses or more.
  3. Check your portfolio allocation. Make sure your investments are diversified in a way that meets your goals for the short, mid and long-term. You may want to consider investing in vehicles that can provide you with a guaranteed income for part of your retirement income.
  4. Check your risk tolerance. You probably haven't changed, but your circumstances might have. Review your investments to see if the risk level of any of them makes you uncomfortable; this will also give you a handle on how ready you feel to redirect money into any new investments that you may want to incorporate.
  5. Look for opportunities with potential changes in tax rates. Since capital gains may go from 10% or 15% to 20% or even as high as 39.6%, perhaps realizing some gains prior to year-end may be advantageous at the current tax rates. You may also want to consider postponing sales that will trigger a loss to the new tax year as the deduction could be more valuable at higher income tax rates. Keep in contact with your financial and tax advisors to stay updated on the potential tax changes that could affect your investments.

Opportunity may not knock, but it is still out there.

Year-to-date stocks have made significant gains (as measured by the S&P 500), and if you're not already in the market, you could miss out on potential opportunities. Additionally, in my opinion if you sold when the market was down, you solidified your losses, with no opportunity to make them back.

Periods of economic and political uncertainty are always going to be a concern for investors due to the cyclical nature of our legislature and its policies. Even though it may seem difficult to keep "climbing higher", a knowledgeable financial advisor and a strong focus on your goals can keep you in control and able to scale any possible cliff ahead.

Heidi Clute, CFP® of Clute Wealth Management in South Burlington, VT and Plattsburgh, NY, an independent firm that provides strategic financial and investment planning for individuals and small businesses in the Champlain Valley region of New York and Vermont. For informational purposes only. LPL Financial does not offer legal or tax advice. Securities offered through LPL Financial, Member FINRA/SIPC.

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