As 2012 comes to a close, investors are counting down the days until the end of the year, at which time the United States will go over the “Fiscal Cliff” (a set of deficit-reducing policies that include tax increases and spending cuts), unless politicians can reach an agreement on the fiscal budget. If they are unable to reach an agreement, these measures, which many economists believe will lead to another recession, will take effect beginning January 1st.
Today we wanted to share with you a different take on this topic, or at least one that has not likely garnered much attention, given the level of media coverage on this topic. It comes from Bill Stromberg, who is director of global equity and global equity research at T. Rowe Price Group. He was recently interviewed about the fiscal cliff, and we want to share with you the short article that was published recently in the USA Today. Usually we like to send client communications that focus on our own thoughts about a specific subject. Today, we thought it would be nice to hear a similar message from an independent source.
It will not be a surprise for our clients that we believe holding the course through this current crisis is the best course of action. We believe this because predicting markets correctly in the short term is extremely difficult, if not impossible, and risky to do. It also happens that for Empirical clients, the work needed to get investors through this type of uncertainty has already been done. The work I am referring to is twofold:
- Asset Allocation: You have a specific asset allocation (mix of stocks and bonds) that is based on you, your time frame, and your expected use of your money.
- Diversification: Your portfolio contains thousands of stocks and bonds from around the world.
This means that your investments are structured in a way that, even with the current uncertainty, your portfolio will survive and thrive over time.
You will also note that Mr. Stromberg believes that at some point interest rates will rise, causing bonds prices to fall. We address this risk by holding bond portfolios for our clients that are relatively short term in nature (under five years on average). Fixed income portfolios with lower duration tend to experience smaller price effects after interest rate changes than portfolios that are more long term.
As always, should you have any questions, concerns, or feedback for us we encourage you to contact your Empirical advisor.