Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
As Washington transitions from a lame-duck Congress to a new session and a second term for President Barack Obama, little has changed from an investor’s point of view:
• The “fiscal cliff” still looms — $700 billion worth of federal spending cuts and tax hikes that will take place in the new year if Congress doesn’t act on some type of fiscal reform. This essentially represents the deal leftovers from the debt ceiling debate earlier this year, along with the last few years of political wrangling. If left unresolved, it would affect unemployment benefits, payroll taxes, defense spending and the alternative minimum tax — a combined 4.4 percent drag on gross domestic product in 2013.
• Expiration of the Bush tax cuts would mean $220 billion-plus in new taxes.
• The pay roll tax holiday expiration would add $95 billion in new taxes.
• The budget cuts would take more than $60 billion out of the economy.
• Further implementation of the Health Care Reform Act means a new 3.8 percent tax on investment income — capital gains and interest — on top of underlying tax rates for families with adjusted gross income above $250,000.
• Europe is still a financial basket case.
• We may have yet another debt ceiling fight in Congress.
These realities will likely cause market volatility the rest of the year. The fiscal cliff debates, along with unsolved issues in Europe, could make for significant “headline risk” — the kind that causes big one-day market moves, often sell-offs.
But our economy is still moving in a positive direction. That momentum can likely be maintained for the near term, especially if Congress gets its job done before New Year’s Day.
As for your investments, what’s the answer?
Balance is the key: A mix of high-quality, dividend-paying stocks, and bonds that pay steady interest.
Income: If the majority of your investments is paying some form of consistent income, don’t stop or slow down. Dividend-paying stocks could suffer slightly by an increase in the dividend tax rate, but this is one of the main areas we see being “compromised” — and will likely experience a very muted impact on the value to companies that pay dividends.
Stay the course: As long as you maintain balance, and have a solid income approach, your investments will be able to ride out the volatility we could see through December.
Has your investment outlook changed much since last week’s elections?
– Wes Moss, for AJC Atlanta Bargain Hunter blog