Fiscal Cliff Implications

With the eleventh hour passage of the American Taxpayer Relief Act of 2012, some might think we have put the fiscal cliff behind us. Unfortunately, this is not the case. While the federal government has temporarily suspended the debt limit until May, without government action the mandatory spending cuts associated with the fiscal cliff will begin in March. With this continued level of uncertainty and continued low fixed income rates, many institutions may struggle to find an investment strategy to keep up with spending requirements. Investment and Finance committees should keep two important themes in mind.

First, think twice before assuming committee members, financial advisors or consultants know more than the market already knows about how future events will impact the market. The record is poor for investors who have made this faulty assumption. Take for example, historical performance of hedge funds, considered by many to be managed by the best and brightest, and the overall performance of endowments with billions of dollars of investable assets being managed, yet both generally have been unable to outperform simple low-cost, broadly diversified investment strategy. Over the past 10 years, hedge funds as a group have underperformed the S&P 500 Index by almost 81 percent over a period where the S&P 500 itself did not perform extremely well.

A Vanguard study also confirms the inability for institutions to beat market benchmarks. The study found endowments under $100 million would have achieved better risk-adjusted returns by using lower-cost, diversified stock and bond strategies.

 

vanguard study

The second thing to keep in mind is there is a reason stocks have outperformed safer fixed income investments by a large margin over longer periods of time. They are riskier and that risk encompasses political risk as well as more economically-oriented risks.

We continue to believe that maintaining a low-cost and well-diversified portfolio that reflects your need, ability and willingness to take risk provides the odds to achieve investment goals. There is little in the current environment that warrants changing from that view.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2013, The BAM ALLIANCE

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