written by reader Title: Fiscal Cliff

By hammledge1, September 10, 2012

I asked my IRA manager what his plans are to prepare my IRA for the upcoming fiscal cliff impacts beginning January 1, 2103. He said, ”stay the course, maintain our current diversifiction and allocations.” My gut is telling me to withdraw all of the investments except the gold, silver and Kinder Morgan positions and park them in cash until early spring and then re-enter cautiously when we see what is or is not happening.
Any thoughts would be appreciated.

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Travis Johnson, Stock Gumshoe
September 10, 2012 9:52 pm

I can’t tell you what to do, of course, but it’s not my inclination to try to time the market and move in and out based on “big picture” events like that. It’s far too unknowable what impact, if any, the “cliff” or the legislative response to it will have on the global economy or the stock market.

If the economy does collapse for tax reasons, I expect gold and silver would collapse with it — the cliff won’t make people feel the world is going to end and rush out of the dollar, it will just make them fear that they’ll pay higher taxes. Even at higher tax rates, it is difficult, with interest rates below 1% for savers, to come up with an investment strategy that can grow a portfolio enough to overcome potential future inflation without focusing primarily on buying equity in growing, profitable companies.

I suspect that if there’s a measurable short-term impact it will most likely be the impact of relatively heavy selling pressure in the last two months of the year if investors want to lock in relatively low capital gain tax rates, but that doesn’t make me want to sell now and buy back in early January — the chances of me choosing the right time and selling higher now and buying back lower in a few months are not all that high. I am not a rapid trader or a market timer — I do look for opportunities in beaten down stocks, but I don’t fool myself into believing that I can predict what the broad market will do for the next six months.

If the higher tax rates do go into effect in January, I suspect that it would be relatively favorable for BDCs, MLPs, Trusts and REITs, since, depending on what happens, they may no longer have their income distributions be treated at a tax disadvantage (or at as much of one) to other dividend-paying stocks, but many of those are already doing quite well in this yield-starved environment.

Just my two cents. Hopefully some other folks wil share their opinions for you.

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