Investment planning for the "fiscal cliff"

[MacGyverIt]

Hey folks,

Just read this article on the WPost talking about how some political elements see the "fiscal cliff" as a good thing.

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/10/26/meet-the-fiscal-cliff-divers/

"Hanson predicts it will actually take much longer than the cliff-divers imagine to come to a deal if we pass the deadline. And by that point, significant damage would be done to growth, the stock markets, and consumer and business confidence. “It definitely increases the chance of having one quarter if not two of negative growth,” he said."

In the past year, I stopped putting money into the stock market given the +13,000 and higher cost of stocks and focused on other FI goals (debt reduction). I plan to have a nest egg set aside just in case I can swoop in and pick up some cheap stocks/funds during the illogical market panic cycle.

I'm interested if anyone else here in the forum is keeping these cuts in the back of their mind as an investment opportunity when/IF the CNBC-types freak out on 01 January?

- Mac

[Vangogh]

Yeah, you could say that I don't have a lot of faith in the markets right now. I think the overall P/E is too high and the general outlook for growth is bad. For this reason the bulk of my investments are in exempt market securities. For my market investments I look for a couple companies that fit my investment theme that trade at a discount to book value. My time horizon is 10-15 years so after i've bought, i forget about it. Sure in the next 2-5 years something could wrong with the world, but if my thesis is right eventually the price will come around to what I think it should be.

The stats say that I have a very low chance of beating the market. But I sleep better at night knowing that I have invested in a manner that makes sense to me. They also say that timing the market is difficult to do. Not every market downturn is like 2008.

[TheDude]

Great topic. I believe in pretty passive investments. I pay little attention to PE ratios because I invest in index funds to track the broad market. Interestingly, as compared to the previous poster I think in the long run I will do very well in the market. I know I can't time it and I wont try. I sleep very well at night

On the other I actually pretty optimistic about the country right now. I work for a small company  (11 people or so) and we only sell to companies. There has been a pretty nice uptick in business for us lately. That inclue work in Japan and Europe. I think we have turned the corner. Might we have a quarter or two dip sure but ultimately we are on the up swing.

[Jack]

I think the "fiscal cliff" itself is a good thing, and I don't want Congress to make a deal before or after. The US needs both the spending cuts and the tax increases, and the more the better.

Of course, I'm both young and in "pay off debt" (rather than "invest") mode, so my perspective may be different than the majority. My main concern is whether there's going to be high inflation, in which case I want to re-leverage while money is cheap (albeit at lower interest rates than I'm paying now).

[MooreBonds]

I'm interested if anyone else here in the forum is keeping these cuts in the back of their mind as an investment opportunity when/IF the CNBC-types freak out on 01 January?

You have to remember that it will take an entire year for the tax-side ramifications to fully come into effect, since taxes for many (except estimated tax filers) aren't due until 2014. So the question then becomes the spending side impacts and short-term/long-term effects.

Because I think the economy overall is still limping along (some sectors growing, while others still languishing), either way it won't be a massive drop or massive surge in the markets from the legislation. Whenever the 2013 politicians do get very close to passing the legislation - whenever that is - it should help give a pop to markets, whether good or bad, just from ending the uncertainty. Then the long-term impacts will start to move things around, depending on what agreements are hashed out.

Either way, I'm not really changing course. Simply continuing to DRIP dividends, and look for bargains when I accumulate a stash of cash to put to work.

[jrhampt]

I'm not really sure what to do about this, so I've been hedging my bets by splitting extra money between a muni bond fund and my usual stock index fund investments.  I'm also keeping some cash available in case there's a good opportunity to buy, and I may add some more foreign stock index fund investments.  Finally, I'm putting a bit of extra money toward the mortgage just because I'm at a loss as to what else to do with it and I figure it can't hurt.

[dionysiandame]

I think the "fiscal cliff" itself is a good thing, and I don't want Congress to make a deal before or after. The US needs both the spending cuts and the tax increases, and the more the better.

Of course, I'm both young and in "pay off debt" (rather than "invest") mode, so my perspective may be different than the majority. My main concern is whether there's going to be high inflation, in which case I want to re-leverage while money is cheap (albeit at lower interest rates than I'm paying now).

I am so glad someone else said this (though we may be in the same age bracket so we're not as "fearful") because I feel pretty much the same way. I do not think the 'fiscal cliff' is going to cause the kind of mass market pandemonium being touted in the WSJ (thank the gods for the FT or I'd go nuts with all of the fear mongering).  If anything, it's something our country desperately needs and it saddens me that both prime candidates are dead set on doing something to stop the bitter pill we have to swallow. I'd vote for whoever is actually willing to cut the ridiculously bloated defense budget, but considering that's the only way this country seems to support anything involving science I remain, emotionally, on the fence.

Then again, I don't take tax deductions of any type (while paying on income) and consider paying taxes my duty as a civilian citizen so maybe I'm not so attached to paying as little as possible for the privilege of living in a first world country with all of the amenities said good fortune encompasses. Oh no, I'm not bitter about the "other" kind of atttitude at all. LOL!

That said, since we don't really have much a precendent though we can always look to Greece to see what happens when you have a citizenry dead set on not paying taxes while the government implements austerity. As far as how my investment vehicles will change, I don't know yet. I'll probably contact Fidelity to find out how, if at all, my 401k will change and since I go long and buy low for value, if stock prices fall I'll probably go shopping.

I remember something one of my least favorite Econ profs said; 95% of the market is self-fulfilled prophecy.

And Americans LOVE talking ourselves into a good apocalypse. Must be all that pent up puritanism. Ha!

[tooqk4u22]

Then again, I don't take tax deductions of any type (while paying on income) and consider paying taxes my duty as a civilian citizen so maybe I'm not so attached to paying as little as possible for the privilege of living in a first world country with all of the amenities said good fortune encompasses. Oh no, I'm not bitter about the "other" kind of atttitude at all. LOL!

Just because you don't take deductions doesn't mean you pay high taxes, and if you do it means you are a high earner.

That said, since we don't really have much a precendent though we can always look to Greece to see what happens when you have a citizenry dead set on not paying taxes while the government implements austerity.

The issues in Greece are not the result of low taxes - they pay very high taxes in total income, social security, VAT - they are the result of government spending that far exceeds that tax base.  That is where the US is going - while we may have some room to increase taxes, it means nothing if spending is not reduced (btw every proposal from democrat or republican at best only slows the growth in spending overall and does not actual cut spending).

Back to topic, the fiscal cliff is real - some of it won't be felt until later in the year and some of it has already been felt. Any company that has government contracts stopped making decisions/investments related to those contracts six months ago.  So the spending side is already in motion - now if the gov't fixes it it will take two quarters for the decisions to get made and implemented.

[dionysiandame]

Just because you don't take deductions doesn't mean you pay high taxes, and if you do it means you are a high earner.

I never said I pay "high taxes" I said I don't take deductions; so I don't expect money back just because I laid on my back (got knocked up), or went to school, or farted in the air while making a phone call. I'm smack dab in the middle "tax bracket" wise; but I don't shirk my responsibility and I don't whine about it either. They could close every damn loophole in the tax code, which they should, and I'd be happy as clam like "Finally!"

The issues in Greece are not the result of low taxes - they pay very high taxes in total income, social security, VAT - they are the result of government spending that far exceeds that tax base.  That is where the US is going - while we may have some room to increase taxes, it means nothing if spending is not reduced (btw every proposal from democrat or republican at best only slows the growth in spending overall and does not actual cut spending).

To refute that, feel free to look into a documentary done by the BBC (which can be found on their website) at the almost national culture of not paying taxes, a left over from when the country was under Turkish rule (yeah it was a long time ago, but an ingrained habit is what it is).  Even with austerity in place (which Greece has done) the inability to raise revenues (what with many Greeks not paying income and or/property tax over the course of many years and still dodging) has not helped Greece claw its way back up from the brink. Did the government overspend? Yes. But I imagine their fiscal woes may not have been so severe if the government implemented a way of insuring that taxes were paid; a veritable drama that is occuring now.

Hence, why I feel the "fiscal cliff" is a good thing; it cuts spending dramatically while raising revenues. Close the loopholes. Raise taxes. Slash the ridiculous defense budget, reform social security/medicaid/medicare. I'd say invest in better education but...well that seems like a waste on this population so whatevs. *shrug*

[tooqk4u22]

Hence, why I feel the "fiscal cliff" is a good thing; it cuts spending dramatically while raising revenues. Close the loopholes. Raise taxes. Slash the ridiculous defense budget, reform social security/medicaid/medicare. I'd say invest in better education but...well that seems like a waste on this population so whatevs. *shrug*

I 100% agree with you in spirit....but should not be done in an irrational thoughtless way based on a compromise that was created in an irrational thoughtless way.  The problem is that there are toooooooo many sacred cows.