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Does the Fiscal Cliff Matter?

The ‘fiscal cliff’ dominated the news in November and will likely continue to rule the airwaves, newspapers and internet through the end of the year.  For the uninitiated the fiscal cliff represents a combination of spending cuts and tax increases that will kick in as of January 1st.  They were a result of the agreement reached through the debt ceiling talks in the summer of 2011 as an automatic cut into the debt if no other agreement could be reached.  Many believe that the economy is still in too fragile a state to withstand less government spending and more taxing and thus the concern and posturing from politicians and pundits.

At Raffa Wealth Management’s most recent Investment Committee meeting we discussed the topic.  The full committee was in attendance including:

  • Bill Snider, CFA, Co-founder & Managing Partner at BroadOak Capital Management
  • Philip English, Ph.D., CFA, Assistant Professor American University, Department of Finance and Real Estate
  • Alexandre M. Baptista, Ph.D., Associate Professor of Finance, The George Washington University School of Business
  • Robert J. Willen, CFA, Portfolio Manager at Wagner Bowman Management Corp.
  • Andrew Kline, CPA, CFP®, Managing Member of ARK Financial Services
  • Gergana Jostova, Ph.D., CFA, Associate Professor of Finance, The George Washington University School of Business
  • Joe Del Guercio, M.B.A., Managing Director at CNF Investments, LLC

Each member provided input on what they thought would happen and how that would affect the markets.  As a fun exercise each committee member and RWM staff member made their prediction for the level of the S&P 500 at the end of January.  We used this date as it provides the market with some time to digest any deal or lack of deal that is reached.  Answers varied from as much as a drop of 10.5% to a rise of 5.4% with the average being a drop of 0.9%. 

While no one knows for sure what will happen to stock markets over the next two months, it should be immaterial for long term investors.  They should be concerned about the direction of the market over the next ten years, not the next two months.  The volatility in the markets we will likely continue to see for the remainder of the year should not alter your investment allocation.  Attempting to guess what will happen with the fiscal cliff and position your portfolio to that affect will likely result in more harm than good.  Stock market movements over such short time periods are noise in relation to long term investing.  By focusing on your portfolio’s goals and building an investment allocation to achieve that best allows an investor to succeed.  

Index Performance                                  Nov.     YTD     Trailing 1 Yr       

US Stock (Russell 3000)                              0.77%    15.01%     15.95%        
Foreign Stock (FTSE AW ex US)                 1.91%    13.69%      12.37%        
Total US Bond Mkt. (BarCap Aggregate)   0.16%     4.36%       5.51%         
Short US Gov. Bonds (BarCap Gov 1-5 Yr) 0.21%    1.01%       1.20%
Municipal Bonds (BarCap 1-10yr Muni)     0.91%      4.36%      5.93%
Cash (ML 3Month T-Bill)                             0.02%    0.10%       0.09%       


Raffa Wealth Management is an independent investment advisor providing nonprofit organizations, high net-worth investors, and qualified retirement plans with a full range of investment consulting services.  We were established to fill the need for transparency, clarity, and vision in the professional management of investment assets.   Visit us at