Jumping off the fiscal cliff

What’s the best way to position your portfolio so it doesn’t fall off the fiscal cliff? Try doing nothing.

That’s not what you’ll hear in the media, or from some securities firms. Fidelity recommends real estate investment trusts that specialize in healthcare. Seeking Alpha says investors should reduce exposure to U.S. industrials while overweighting global technology. Bond manager PIMCO sees “fiscal contraction without fiscal catastrophe” and an opportunity to sell long-term Treasuries in preparation for inevitable inflation.

Our friends in Venice, Kelly Caldwell and company of Caldwell Trust, say they are creating a defensive posture in client accounts by emphasizing less cyclical investments while keeping equity exposure at current levels. And one writer for the Wall Street Journal cautions about harvesting profits ahead of an almost-certain rise in the capital gains tax rate, advocating a focus on prepaying expenses such as tuition and state taxes.

At Vanguard, the cost-sensitive mutual fund company believes investors should take a wait-and-see approach to portfolio allocation. Rather than anticipating tax rates, you might:

  • Make sure any tax-related decisions are truly in line with your long-term financial goals. A question to ask: are you choosing to recognize capital gains this year because it’s a good move for your portfolio or because you’re speculating that rates are headed higher?
  • Keep taxes in mind throughout the year, not just at the end. That gives you plenty of time to evaluate your situation and make necessary changes.

To that advice I would add a third point, one that Vanguard has championed for years and is echoed by several writers at the Journal: when it comes to your portfolio, think about strategic rather than tactical asset allocation. Year-end shuffling in anticipation of possible rate hikes is a form of short-term trading, one that’s subject to the views and emotions of the moment. Those will change. Your long-term goals probably won’t. Allocate for that.

Then turn off the news.