Investor Response to the Fiscal Cliff

By Allan Jaster, Principal, The Archer Consulting Group

Allan CropThere is a ton of attention these days on the so-called “Fiscal Cliff”.  As an investor you’re probably asking yourself “what should I do about it?”  And, that is a fair question.  If you can suspend your reality for a minute or two and read through the below nautically themed scenario, I think it might provide a little insight as to how our financial markets work… and, subsequently, what you should (and shouldn’t) do about it.

Imagine you’re the captain of a boat and you’re sailing across the ocean (feel free to give a throaty “Arrrrrr” right here.)  Your mission is to cross the ocean as quickly as possibleOf course, the most efficient and fastest route is a straight line but you happen to be sailing in an ocean that has icebergs.   Your eyes constantly scan the horizon searching for icebergs and when you see one, you quickly course correct to go around it.

Now let’s say you’re sailing on a clear day, making good time and you spot a VERY large iceberg.  Now it’s a big one… but it’s about 20 miles away.  No problem.  To deal with the iceberg you calculate that you’re going to need to sail three miles out of the way.  So you give your boat a slight bit of steerage- just enough to barely miss it.  Why only a little rudder?  Remember – you’re trying to cross the ocean as fast as you can so sailing as straight as possible makes the most sense to you.  What’s the cost of missing the iceberg?  Well you did have to sail three miles out of the way and you’re not too happy about that… but for your inconvenience, you’re avoiding slamming into an iceberg.

Although much more complex, our Financial Markets are no different than the above scenario.  The Fiscal Cliff is an iceberg that you and every other investor spotted years ago.  Thus the effects of the Fiscal Cliff (and Obama-Care) have been reflected into your portfolio years ago.  Yup.  Ask yourself this:  “Is an iceberg that I can clearly see on the horizon a threat to my ship?”  No – it’s not.  All the good… and bad effects of the Fiscal Cliff have already been priced into your portfolio.   I was talking to a client the other day about this and she had a wonderful quote on this very topic – “it’s already baked in the cake.”  Now, to further make this point, let’s briefly discuss the opposite scenario where you’re sailing along with nothing visible on the horizon and you slam into an iceberg that was hidden just below the surface.  Uh oh – now that can be bad.   This scenario is the equivalent of the dot.com bubble or housing bubble bursting.  Most investors didn’t see that coming and the dramatic steep market decline illustrates this.  Everybody sees the current iceberg.

What’s the big take-away?   If you chose not to embrace the idea that “it’s already priced in”, then your investment road will be a rough one.  You’re destined to go from crisis to crisis.  As soon as this particular issue (Fiscal Cliff) comes and goes, our wonderful media will help you find something else to fret about.  Successful investors take a well-diversified, long-term approach and have the experience to know to sit calm and let others flap about.

Allan Jaster – The Archer Consulting Group, LLC.