Linda P. EricksonLinda P. Erickson, CFP®, is the president of Erickson Advisors and a registered principal offering securities through Cetera Advisor Networks, LLC, 336-274-9403 lindae@ericksonadvisors.net.
In every Presidential election year I get calls from investors worried about a potential negative impact to their portfolios due to the impending election.
Please note: both sides express concerns, just in different years. For an answer to this year’s question, we might look to historical precedent. In the fourth quarter of an election year, mostly after the election, the stock market goes up because the risk of the unknown is taken out of the investment decision. This year, however, may be different because of the looming budgetary deadlines now referred to as the “Fiscal Cliff.”
What is the Fiscal Cliff? It is a series of delayed, but now coming due, budget decisions passed into law in 2010 and 2011. They are, in brief:
- The expiration of the Bush tax cuts
- The expiration of the AMT “fix” with no reauthorization for 2013
- Reversion to a normal 6 percent payroll deduction for Social Security tax deductions from employees’ wages, up from 4 percent
- Approximately $1.2 trillion in automatic cuts equally to Domestic Discretionary Federal Spending and Defense Spending
Why should we care about this cliff? It’s not called a cliff for nothing. Economists and other independent analysts estimate that these revenue reductions, if experienced in whole, could reduce the GDP – growth of our economy – by about 3.5 percent. Our economy is projected to grow at 2 percent next year, and even simple math brings us to a quick negative number of -1.5 percent, better known as a recession. We all know the stock market will decline in advance of an economic decline, so the Fiscal Cliff could be bad news for our portfolios, at least in the short term.
What can investors do in the face of this uncertainty? First, be honest about your ability to withstand volatility, at least the negative kind. Second, communicate that assessment to your financial advisor so that he or she can propose a short-term strategy suitable for you. This short-term strategy may include some re-allocation to asset classes that will move against any downturn, such as bonds, cash or cash alternatives. Third, remember that sharp negative returns are generally followed by a period of positive returns, and a calm implementation of your re-entry strategy is your best long-term defense.
Portfolios with a core allocation to large US stocks with a history of rising dividend payout and a range of types of corporate bonds will add yield to your portfolio. Adding systematically to an appropriate allocation to equities will offer the potential for participating in whatever the next cycle of positive returns may be.
There is an old saying that stocks climb a wall of worry.