From Main Street to Wall Street, there’s a lot of discussion going on about the pending “fiscal cliff,” along with speculation about what it may mean for the US and other world economies. The term “fiscal cliff” was first coined by Ben Bernanke, and has entered our vocabulary with surprising speed. The phrase refers to federal spending cuts and federal tax increases that will automatically take effect on January 1, 2013. If the US Congress takes no action, the higher federal tax rates are projected to increase tax revenue in 2013 and beyond, while federal spending is mandated to fall for the next several years.
In order to sidestep the cliff, President Obama and Congressional leaders will have to compromise on a wide range of issues. These include reductions in defence and non-defence spending, deciding whether to extend the Bush tax cuts, whether to raise the payroll tax, how to deal with extended unemployment benefits and reimbursement cuts to Medicare doctors.
With the world watching, the White House and Congress are expected to act quickly to resolve the uncertainty about the US’s fiscal future. If Congress and the White House agree on a deal in early 2013, lawmakers could retroactively restore the prior tax rates and approve additional federal spending.
Many people are probably concerned about the impact of the pending changes but as seasoned investors know, financial markets can rise and fall with the latest cover story, especially when the news comes from Washington. To weather the ups and downs that occur in the economy, only make decisions that will be advantageous for you in the long-term, and avoid overreacting.
The best approach may be to keep your eyes fixed on your destination and not get side-tracked on day-to-day market fluctuations. Your investments should reflect your financial goals, time horizon, and risk tolerance. Remember: when uncertainty grips the markets, it may be a great time to take advantage of new opportunities, rather than overreact to short-term events.