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Understanding the Fiscal Cliff
By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com
Whether you’re pleased or disappointed with the outcome of the Presidential election, the question to ask now is, “What does this mean to me?” It’s an especially important question if you own a business, are a medical professional, or are investing for retirement.
Wealth Implications Not Good
If you have wealth, the implications are not good. Keeping the current tax code would take some type of lame duck session compromise in Congress, which Speaker Boehner has said is improbable. It’s wise to expect a reversion to the old tax code on January 1, 2013, which means higher taxes on income, capital gains, and dividends.
Tax Code
Even if Congress revises the tax code, the changes will probably not include lowering taxes for “the rich.” This is the first Presidential election I remember where both candidates promised not to taxes on “the rich,” defined by the current administration as individuals with an adjusted gross income of over $200,000 and couples with $250,000.
Small Businesses [Medical Practices]
If you are a small business person, like a doctor with a private practice, with retained earnings held in a C corporation, you need to move now to take dividends in 2012 and pay the 15% tax. Waiting until next year may mean you pay up to triple that amount, based on comments made by the President. You also need to consider accelerating profit-taking into 2012 to take advantage of the 15% capital gains rate that is sure to increase in 2013 and will possibly double. The large market drop right after Election Day was probably a result of investors harvesting gains.
A Sea Change Regarding Wealth
The fact that a sitting President overcame so many negative economic issues to win reelection is almost unprecedented. It’s a sign of a fundamental change in this country. There is a growing disdain for people who have wealth and a notion that they “owe” society for their success. If you have wealth, you don’t want to appear as if you do. Now is a good time to get serious about good asset protection planning to provide a firewall against those who feel they deserve your wealth more than you.
More Regulations
We can also expect the President and Congress to continue on the path of creating more regulations for all business owners. Not only does this make it harder for those wanting to pursue the old American dream of starting new businesses, it will drive up costs on everything while it drives productivity down.
More regulations will affect your pocketbook in many ways.
For example, while investors and their independent financial advisors need a healthier, more business-friendly regulatory environment, they are not going to get it anytime soon. One study suggests that proposed legislation aimed at independent advisors would raise our costs over $50,000 a year to comply with a plethora of new regulations. Some of those restrictions would even make it illegal for me to publish a blog.
Investing Fundamentals
When it comes to investments, it’s time to rely on the fundamentals we’ve preached forever: you must be globally diversified in many asset classes. You do not want a majority of your assets to be invested disproportionately in any one country, including the US. If more than half of your assets are in US securities, you need to consider better diversification sooner rather than later.
Assessment
This election made it very clear that our movement toward a more government controlled economy will not abate anytime soon. Rather than bemoaning this new economic climate, free-market proponents and capitalists will be wiser to focus on working within it. This includes taking appropriate action to protect themselves, their families, and their investments.
As always, wise physician investors will avoid knee-jerk responses to political and economic shifts, remembering to focus on the long term.
Conclusion
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Filed under: Investing | Tagged: Fiscal Cliff, rick kahler, Speaker Boehner |
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How Will Obama’s Re-Election Impact Financial Advisors?
With four more years of the Obama administration, members of the financial advisory industry now share their perspectives on what the win means for the industry and the clients they serve.
http://www.financial-planning.com/news/Advisory-Community-Reacts-to-Obama-Re-Election-2681738-1.html?ET=financialplanning:e12198:86235a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__111312
Naomi
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2016
As we get closer to election day, the most common question people ask me is, “What is the election going to do to my investments?” This is usually followed by, “If ___________ is going to be elected president, don’t you think I should get out now while I have a chance?” It really doesn’t matter whether the blank is filled in with Clinton or Trump; many people think one or the other will mark the death knell of the economy.
I’ve witnessed these same concerns in other presidential elections over my 35 years as an advisor. People are always worried that if the candidate they dislike becomes president it will be devastating for the markets and their portfolio.
Are there some precautionary measures you should take to protect your retirement portfolio from an election day disaster? Let me share what I am doing in my personal portfolio to prepare for the worst: nothing. I don’t believe that whether Clinton or Trump wins will make any long-term difference to a diversified investment portfolio or the US stock market. There is no past evidence to suggest otherwise.
I would expect most investment advisors to agree with me. But according to an article by Michelle Zhou in Financial Planning on September 13, 2016, “Election jitters have advisers seeking liquidity for retirement plans,” I was surprised to find this is not the case.
The magazine asked 320 advisors, “How will the outcome of the U.S. election impact retirement planning, and what actions are you taking now?” I want to emphasize that the question focused on the impact to retirement portfolios, which inherently are long-term in nature. This wasn’t a question about how to play the market immediately before or after the election.
Apparently, most advisors believe this election will have a lasting impact on their clients’ portfolios. The article quotes one advisor as saying that, “Preparing our clients mentally and taking income-stabilizing precautions for our clients in retirement is a priority now.” Another said they are building larger cash positions “as the equity markets test all-time highs and we have such uncertainty regarding our future leader.” Still others said they are selling equities, putting more into liquid assets, and halting new investments altogether.
This is fascinating to me. Basically, the average advisor is acting out what the average client is thinking: “When things look rocky, let’s bail out.” Based on what we know of how the brain works, there is a high probability this isn’t good news for their clients. As an investor who does not have a financial advisor recently told me, “The biggest value proposition of having a financial advisor is keeping you in the markets during downturns.”
I was further amazed to read that when advisors were asked how much the election would affect their financial planning practices over the next 12 months, around 6 out of 10 feel it will have a moderate to high impact on their business. Seriously? Just 1 out of 10 advisors say this election will have no impact on their firms.
From what I read, the question didn’t specify whether the impact would be negative or positive, so maybe advisors are expecting positive changes. However, it looks as if most advisors are expecting rough seas for both their businesses and their client’s long-term portfolios regardless of who wins the election.
Given the unprecedented nature of this particular presidential election, it’s not surprising that investors’ sentiments are more intense than normal. That doesn’t mean their fears are any more valid than in other elections. As usual, the best way to election-proof your portfolio is to leave it alone.
Rick Kahler MS CFP® ChFC CCIM
http://www.KahlerFinancial.com
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