The Fiscal Cliff

Forefront in many of our minds lately has been the looming “Fiscal Cliff.” Over the past few months we’ve received a lot of questions from people, maybe even you, about whether they should be making financial moves in anticipation of the “cliff.” Our answer was always the same, and sounded something like this: “We don’t know what the ultimate resolution to the fiscal cliff will be and we especially can’t predict how the markets will react to whatever happens. What’s important is that we (meaning us the advisor and you the client) have a plan in place to accomplish your goals based on your unique situations. We don’t invest based on short-term predictions, because no one can predict the future, it’s more expensive, and it’s counterproductive.”

While events like the Fiscal Cliff seem like major events that should be accounted for and anticipated, the reality is that no one can predict what is going to happen until it does. It’s inescapable human nature to have what’s known as Hindsight Bias, which means that after something occurs we think we could have predicted it much better than we actually can. Thinking back on events, it’s easy to say that of course we saw it coming when in reality, we didn’t.

If you had attempted to predict how stocks would react to the most recent Fiscal Cliff deal and position your market exposure accordingly, many investors would have been out of the market completely (not to mention incurring significant trading expenses). The market is up around 4% over the past 2 days; huge gains that many other investors missed out on because they were trying to time the market. Conversely, some people may have been “expecting” those market gains, and would have put all their money in equities. While it would have paid off this time, when you look at the risks you were exposed to and the costs and downside to your bet, it’s a wonder you didn’t have a panic attack just contemplating it.

Think of it like betting on Red at a roulette table in Vegas; fun in the short term when you win, but no way to invest for real goals.

Are we claiming that we predicted these recent market gains and maintained your market exposure in anticipation? No, I’m saying we had no idea what was going to happen, and neither did anyone else (financial professionals included). We stuck with the plan we developed fully acknowledging that there will be market swings that we can’t predict, but also knowing that our plan accounts for those.

Don’t confuse this with simply sticking our heads in the sand and blithely ignoring reality. However, we act on things we can control rather than react to things we can’t. There’s an important distinction there, and it’s a distinction that has cost many investors their savings. The recent “deal” includes some important alterations to payroll taxes, investment taxes and tax rates, which will affect us all going forward. Those are things we can and are acting on.

The “Fiscal Cliff” fiasco is not over, as most of the cuts and taxes were merely deferred a couple of months. While the rascals in Congress banter back and forth and delay any real progress until the last possible moment (or pass the buck once more) the markets are going to move. Remember that above all else we are here to serve you as your advisors, we have a plan that we are constantly monitoring, and we work very hard to ensure that you are successful.

Nathan Twining, Wealth Manager
Financial Plan, Inc.