For financial planners such as Graystone Consulting’s Robert Scherer, it’s hard to talk about investing these days without fielding dozens of questions from concerned clients about the “fiscal cliff.”
Investors are worried and some are tempted to pull out of the markets. But Mr. Scherer, like most other financial advisers, is counseling clients to keep their eyes on the big picture — and not overreact.
Worrying about short-term results is no way to invest for the future, the managing director at Graystone said: “It’s like trying to focus on driving, but looking 2 feet ahead of you instead of way ahead of you.”
The fiscal cliff — the automatic spending cuts and tax hikes set to kick in at the end of the year if Congress and the White House can’t come up with a long-term federal budget solution — is just the latest wave of financial turbulence from Washington, Mr. Scherer said. There will always be another wave down the road.
Last year, it was the credit rating downgrade in the United States. Now, it’s the fiscal cliff.
Mr. Scherer predicted the impact of the fiscal cliff’s spending cuts and tax hikes — if they happen — won’t be as bad as many fear.
“The fiscal cliff has caused an awful lot of angst amongst investors already,” he said. “If it were actually to take place, my gut is that there is an element of this that is already priced in.”
“To make changes based on an election outcome or the fiscal cliff, to me, is unreasonable,” said Mr. Vaughan, the managing director of Morgan Stanley’s private wealth management division in Menlo Park, Calif. “I think the uncertainty of people’s portfolio returns as a result of the fiscal cliff creates more conversations with current clients. It’s very topical.”
It’s important to note that investors pay capital gains taxes on their profits only when they sell, so long-term investors who hold on to their assets have less to worry about than short-term market traders.
But financial advisers agree that investors who were already planning to sell an asset should do so this year to take advantage of potentially lower tax rates.
“If you’re going to sell, you’re better off selling this year than next,” Mr. Vaughan said. “If you’re not inclined to sell it, I wouldn’t go out and sell it just because the tax rates are going up.”
Barron’s, the financial trade publication, has twice ranked Mr. Vaughan the top financial adviser in the nation. He manages more than $9.8 billion in total assets.
Mr. Vaughan said many of his clients are turning to municipal bonds because “it’s tax-free at a federal level, and can be tax-free at a state level.” He also said clients are looking to invest in sectors, such as the food industry — customers aren’t going to suddenly stop eating, no matter what happens to the economy — that are better positioned to weather a potential downturn. “They are less inclined to own stocks in economically sensitive companies,” he said.
Ric Edelman, chairman and CEO of Edelman Financial Services in Fairfax, is also preaching patience.