If you’ve had the good fortune to see the movie, Lincoln, still in theaters, you had to notice that US politics in the 1860’s was as convoluted as US politics today. Watching our current leaders dance on the edge of the “fiscal cliff” provides a sense of déjà vu. The nation went on after 1865 and will go on in 2013.
Regarding the cliff, a concerned client emailed this question this morning:
“Should we be out of the market right now and sitting on cash until this blows over?”
Here is my answer:
No. There is no doubt that things are on edge because of the situation in DC. However, here’s why we don’t want to sell out:
1. Everybody knows about it. Probably no investor on the planet is unaware of the fiscal cliff and all the issues. The markets are factoring that into pricing. The things that really wallop (highly technical term!) prices are things that come out of the blue as a surprise. That said, when we actually get closer to midnight 12/31 without consensus, we would expect a decline. Personally that’s what I believe will happen.
2. Even if we knew exactly how the events will unfold, we cannot reliably predict how the markets will react. Having done this a long time, this is a lesson learned from experience. There are many examples of times when, if you knew the coming events, you would have sold – and you would have misread the market reaction.
3. There are two decisions involved. If we decide to sell, we will need to decide when to get back in. Once there is a whisper of resolution, markets could climb rapidly and you could buy in higher than you sold. Once it blows over, it’s too late. And there are costs to sell and to buy.
4. You have a widely diversified portfolio. A portion is in core equity right now – low cost, broadly diversified, world companies. You also have an allocation to “opportunity” – gold, energy, real estate, etc. The remainder of the portfolio is designed for stability.
5. These portfolios are for your future. Today’s prices are not your prices. The S&P is below where it was 13 years ago so we are in a long, go-nowhere market that has experienced two >50% declines since 2000. A better place for us as investors right now. I’m much less worried today than I was in 1999. Over your lifetime, values should be significantly higher. Realistically, you should hope that markets don’t rise until you take distributions! Note: we have already accrued anticipated near-term distributions in cash.
6. We will come to some resolution in early 2013. My guess is that waiting until tax rates have risen will give the legislators and Obama the ability to say “See, we lowered taxes”. It releases Republicans from the Grover Norquist pledges and enables everybody to claim a victory. It forces spending cuts that can then be selectively restored. Convoluted? Of course. Once we have clarity, even though everyone will have things they don’t like, we can move forward.