Approaching the Cliff

No Harm, No Foul

A current pressing topic for investors is what, if anything, to do about the "Fiscal Cliff."

I learned long ago that taking actions based on expectations about what Congress will do or even has done is often a losing proposition. Congress routinely acts in ways that puzzle even its top leaders. Legislation frequently is so complex that its true impact isn't apparent for years.

Nonetheless, there are times, as at present, when thinking about possible Congressional action could prompt one to take actions that will be beneficial  regardless of what Congress does. As always, taking action in your financial affairs requires analysis of your unique circumstances. You should not act because of the hysterical guidance from pundits.

When Congress last faced this type of situation, in the debt ceiling negotiations last year, the outcome and the market reaction surprised nearly everyone.  For now, make sure that if you take action, you're doing no harm to your long-term interests regardless of what emerges from Capitol Hill.

If what you plan results in improved portfolio diversification, better investments or a more thoughtful approach to your financial future, go ahead. But don't act impulsively and undo long-held plans only because of this short-term  struggle.

The End is Near

Tax Moves to Take Now

Big changes may come to income taxes next year. The media is full of discussions of the "fiscal cliff" and what lies ahead. At this point no one knows for sure what changes are in store.

Rates for ordinary income, dividends or capital gains could rise, perhaps even substantially. Some deductions could be curtailed. Inheritance or other taxes could be revamped.

With this backdrop, there's a danger that investors will over react and take actions that could damage their financial futures. But everyone should at least consider some measures before year-end.

For one thing, investors should focus on the possible rise in capital gains tax rates. If one has long-held positions with big gains, particularly if the holdings are in one or two stocks, now is a good time to consider realizing those gains at the low current rates and diversifying your portfolio. 

Everyone who is eligible for a Roth IRA or Roth conversion should at least consider it. And anyone who has a retirement plan at work or who could institute one should utilize it as fully as possible depending on their personal circumstances.

We don't know what the future holds but we should prepare as best we can.

Patience

One Size Fits All?

Often I’m asked about our investment results for the last year. It’s a reasonable question on the surface but betrays a misunderstanding of investing and personal finance. Unless results are disastrous or too good to be true, you can’t tell much in a year or even a few years.

Each of our clients has a different portfolio and thus different results. Would you outfit all of your friends with size 8 black shoes regardless of their foot size, taste and budget?

For most people, a home is one of their biggest investments. They may live in the house for 20 years or more. Over that time generally --- until the recent unpleasantness – house prices rose. Sometimes prices rose quickly but more often they rose in fits and starts with occasional drops. Long-time homeowners accumulate wealth patiently and while using the house for their family’s daily life, only dimly aware of market fluctuations.

But with the stock market, where prices change continually, people focus on quick results. That impatience isn’t benign; it causes much misery.  Inspect the soup ingredients and the recipe but let it simmer. Don’t yank it off the stove at the first pleasant whiff.

Financial Literacy Day

Financial Education Day at Pace University

The Financial Planning Association of the Greater Hudson Valley is co-sponsoring a Financial Literacy Day at Pace University on November 17. This is a free event with 15 workshops on important personal finance topics and a keynote appearance by Willie Geist of MSNBC's Morning Joe and Kiran Chetry of CNN. I will be speaking on Social Security strategies and participating in a panel discussion on planning a comfortable retirement.http://appsrv.pace.edu/pclc/fed/workshops---seminars.html#sessionone

Is Buy and Hold Really Dead?

Hold Your Horses

To most financial commentators, “buy and hold” is dead. This is a short-hand way of them saying that patient, long-term investing doesn’t work anymore. They cite as proof the record of the broad U.S. stock market averages over the last 15 years which have been flattish.

If long-term is for chumps, trading more actively has gone into vogue. Some professionals using “algorithmic” trading compete by trading a millisecond faster and using that edge to trump the competition.

The only problem is there’s little evidence that over the long term frenetic activity yields superior results. The great investing fortunes have been made by people like Warren Buffet, who hold for decades. Buffet likes to say that his favorite holding period is forever. He’s held some positions for 40 or more years.

There’s considerable evidence that if people try and “time” the market – buying when prospects look good and selling when they are fearful – they damage their portfolios. Extensive studies by consulting firm Dalbar show that  investors typically earn one-third to one-half of the returns of the mutual funds they invest in. Investors get in and out at the wrong time. One day patience won’t be a bad word again.

Rampant Pessimism

Why Investors Flee Equities?

Pessimism among investors has reached epic proportions. The headline above ran last week in the New York Times and led off a discussion of why investors have pulled $130 billion out of the stock market this year.

The previous week, a Times story said “retail investors are not great at trading stocks and many earn poor returns or lose money.” These stories reflect the generally poorly performing markets and terrible economy in recent years.

A generation ago, Businessweek magazine had a cover story on the “Death of Equities.”  Three years after that 1979 article, the greatest bull market of our lifetimes began in August 1982.

Just this week, Bill Gross, the most well known bond manager wrote, “the cult of equity is dying.” It’s dangerous to make predictions since they are frequently wrong. But it’s safe to say that this spate of pessimism, even when well reasoned, is more a reflection of a dismal past than a view into the future.

Investors lurch between despair and euphoria. Risks lurk in both and a successful investor must avoid both extreme pessimism and too much good cheer. Right now most investors can only see a bleak picture and they need to broaden their view.