Investments set for a cliffhanger in 2013

Investments set for a cliffhanger in 2013
06 December 2012

THE month started off with a cliff-hanger of a presidential campaign! The candidates arrived at Election Day neck-and-neck in the popular polls. However, on election night the polls quickly turned and Barak Obama emerged victorious. The very next day, the Dow reacted with its only 2% loss of the month. Otherwise, it was another relatively uneventful month in the markets. The DJIA (Dow Jones Industrial Average) drifted downward, and closed November at 13,025.58.

Now, all attention seems to be focusing on the 'fiscal cliff' that has been looming large for most of 2012. This refers to a series of tax hikes and spending cuts totalling more than $600 billion that will be triggered on 1st January 2013, if the US Congress fails to reach an agreement on fiscal policy.

'Falling off the cliff'

This Draconian combination of scheduled tax increases, budget cuts, and a couple of other nasties threatens to derail an already fragile economic recovery. In a month or so it will become clear whether the US leadership can avoid the country ‘plunging off that cliff’, so to speak. The markets appear to think all will be resolved. No action, or ‘falling off the cliff’ would be highly damaging to the US economy and could push the economy back into recession by subtracting around 4% off GDP.

‘Falling off the cliff’ is a tail risk that cannot be ignored and it is possible that this risk may not be fully discounted by the market. At the other extreme, some type of ‘grand bargain’ that puts the US on an improved longer-term fiscal path is possible but unlikely. The most likely outcome then is another short-term agreement, which is likely to be seen as another instance of ‘kicking the can down the road’.

A key point to note is that even with a temporary agreement that prevents the economy falling off the cliff, fiscal policy is still expected to be a significant drag in 2013 - this is likely to increase the pressure for countervailing additional stimulus on the monetary side and further rounds of are QE likely.

Much like the European crisis, the fiscal cliff will take its toll on global markets.

Spreading your net

So what can the individual investor do to avoid the looming volatility that awaits many portfolios? Spreading your money across a wide range of companies in collective funds reduces risk and gives you the best chance of successful stock market investment. Apply the same philosophy to your personal investment portfolio by spreading your investments across a wide range of assets.

There are four main asset groups in classic investment management: Cash, Equities, Bonds and Property. Each has a different risk profile, with equivalent advantages and disadvantages.

Cash – if you keep money on deposit or in a savings account, it is instantly accessible, you will get some interest and there’s a very low risk of losing your capital. But generally, returns are low and in a period of high inflation, cash held in savings can lose value alarmingly rapidly!

Equities – The potential for high rewards from stock market growth is matched by possible risks. The potential for growth of individual shares or share types rises or falls according to their risk profile. And the value of your original investment can fall dramatically.

Bonds – A better potential for growth than cash, with corporate bonds providing a higher potential for return than government bonds or gilts, largely because of the higher risks involved. Bonds also provide a regular income, which can be higher than returns on cash investments.

Property – Property funds invest mainly in commercial property, which tend to rise in value during a boom, and lose value in a depressed market. However, the relatively long time it takes to buy and sell property can make it a safe haven when stock markets are volatile. It can take up to six months to cash in your shares in property funds.

Many investment managers now recommend that you should consider gold or other precious metals in your asset spread due to the volatility of the financial markets in today’s climate. The value of gold and precious metals is generally not connected to other asset classes, so can reduce your risk.

Not seen an advisor for some time? Now would be a good time to get in touch! Discuss whether your current portfolio is positioned to sustain the looming uncertainty.

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Are YOU investing alternatively, or more traditionally i.e. property and shares? Share your investment experiences with cashy!


  • nima
    But doesn't the recommendation to buy gold usually happen when its price is already on the up? Meaning pro investors would have bought in, the less pro of us get a worse deal... Plus, word of warning, don't go the route of margin trading!! Unless you really know what you are doing, and the market you are in protects your interests. I was clobbered when the trade went the exact opposite way to what was requested. Human error I was told. Company went bust. Lost my investment.
  • Colin

    Ultimately the cliff is a bit of a red herring because the alternative to the cliff is a compromise, which means higher taxes and lower spending, which in effect is the same as what caused the cliff. Either way there is going to be some form of deficit reduction in 2013. And the FED's QE will take up the slack. So the true cliff will come when the FED stops printing money... So where do we put our money? Well everyone is different -- for me I see good upside in buying quality stocks at low book value.  But it requires work on the part of the investor reading the annual reports of companies they will consider investing in. 

  • Colin

    There is an interesting post which compliments and adds to the good points above. In the author says: "Given all the uncertain floating fins lurking in the economic background, what would I tell investors to do with their hard-earned money? I simply defer to my pal (figuratively speaking), Warren Buffett, who recently said in a Charlie Rose interview, “Overwhelmingly, for people that can invest over time, equities are the best place to put their money.” For the vast majority of investors who should have an investment time horizon of more than 10 years, that is a question I can answer withcertainty."

    It is worth a read here. 

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