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.
“We are telling our clients to prepare, but wait,” said Mr. Edelman, who hosts “The Ric Edelman Show,” a syndicated weekly talk show about personal finance. “Wait to see what Congress does. You should not sell now because it could prove to be unnecessary.”
He is helping his clients prepare, however, in case they need to sell. He is paying close attention to Washington’s leaders, looking for indications on which direction the federal government is headed. He also is analyzing his clients’ assets to determine how much more they would pay if the fiscal cliff’s tax increases go through.
“In the meantime, let’s prepare, so if we do need to sell, we’ll be ready to do so before the end of the year,” Mr. Edelman said. “For many investors, they need to take no action.”
But while they are telling clients not to panic, financial advisers are urging political leaders to find a solution to the country’s ongoing budget problems.
The best scenario for investors, they say, is one in which lawmakers come to a deal that extends the capital gains tax cuts currently in place. The worst case scenario? Increasing taxes to the proposed rates called for under the bipartisan deal that will trigger the cliff.
“As an adviser, we don’t really care which way Congress goes. We just want a decision,” Mr. Edelman said. “We love good news, we can handle bad news, what is very difficult to manage is uncertainty. Congress must end the uncertainty.
He added that the uncertainty is frustrating his clients. “They’re annoyed because they realize that today’s uncertainties are politically driven and could be solved very quickly with proper leadership in Washington.”
Mr. Edelman said it is also important that lawmakers ease the pace of the spending cuts so the economy has a chance to prepare itself. “Turn the cliff into a downhill,” he joked.
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