Are We Really Headed for a 'Fiscal Cliff'?

I ran into a friend at the gym yesterday morning. He is retired and is one of those types that looks at and worries about his portfolio every day. So he stops me and exclaims “Bob….did you see [xyz morning financial show] this morning?! It’s all doom and gloom ! We’re hosed!....”  Of course, this gentlemen, whose intelligence I respect, is pretty much entirely in cash now and has been for some time.

So why is my friend all in cash? Fear. True, the xyz morning financial show was highlighting all the negatives that morning: Europe, Greece, Spain, fiscal cliff, high unemployment, etc. We agree these are serious issues, but the media always highlights the negative, and why not? Negativity sells, it provokes anxiety that keeps people watching….and that sells commercials (remember, the financial news media is in business to make money selling commercials, not providing quality investment advice).

Now, I am not saying my friend is wrong to be primarily in cash. If he sleeps better at night that is important and he may be correct that it is the end of the world. But we doubt it. A few points we would make with respect to all this:

1. Recent investor surveys reflect a very low level of bullish sentiment currently, levels that many times in the past have proven to be a bullish contrary indicator for stocks.
2. Stock valuations are not excessive and many sectors in the market remain attractively valued.
3. Monetary conditions, namely Federal Reserve policy, remain accommodative, which historically has been positive for stocks.
4. The U.S. corporate sector, reflected in profit margins and cash flow, is very healthy currently, and corporate earnings are forecast to grow this year and next.
5. We believe Congress will address the fiscal cliff issue.
6. We believe Europe will find a way out of its ugly morass.
7. No question, the general risk environment is higher than normal, but ‘twas ever thus…..there are always risks in investing and no one has a perfect crystal ball, but historically the best time to invest is when there is rampant fear and uncertainty.

So should we all be like my friend and be all in cash now? From a financial planning perspective, we believe there are ways to capture what we believe is an attractive risk/reward for stocks while being able to sleep at night. How?

1. Have a solid financial plan that provides sound spending, savings, and investment roadmaps.
2. Diversify your investment holdings in order to capture returns of multiple market sectors and also reduce portfolio volatility.
3. Establish an asset allocation that allows you to capture the growth opportunity in equities while also reflecting your risk tolerance.
4. Focus your equity investments on quality, dividend-paying and undervalued sectors of the market.
5. If you are baffled by the market and are uncomfortable with handling your own investments, seek the advice of a qualified and experienced financial planner or advisor.