With the presidential election in the rearview, the fiscal cliff and the prospect of higher taxes remain.
What happens now has been and remains a concern for many people.
Steve Hawks, senior vice president and investment advisors manager at Fifth Third Bank in Grand Rapids, expects a “short period of optimism” now that some uncertainty has been removed with the election, “but the big thing looming on the horizon is the fiscal cliff.”
His clients are concerned about the economy, tax rates and the cost of health care reform on businesses, all of which is holding back the flow of capital until the issues get clarified, Hawks said.
MiBiz spoke with Hawks just prior to the election about managing wealth in the present environment.
How are you advising your clients to prepare for and deal with the fiscal cliff?
We’re talking to every client about what opportunities are available to them, including outright gifts to the next generation and also including the possibility of using a limited family partnership. They can make gifts into that partnership, retain control as a general partner, and then the children are limited partners. So they can still control the assets as a general partner, rather than making an outright gift.
What’s new with how people are managing their money these days?
The question out there is how do I get more yield or income on my portfolio. People are searching for yield. There have been more flows into bonds and money is coming out of the stock market and going into the bond market. It’s been the biggest and best bond rally in decades. As interest rates fall, the value of bonds go up. One of the things we’re concerned about is clients putting more money into the bond market. When rates go up – and they will at some point and bond prices will get hurt – clients will lose money owning bonds when rates are going up.
What other questions are you hearing?
People are also asking, and this has always been in the history of investing: “How do I protect the downside of my portfolio and still earn an adequate return?” The decade of the 2000s, when the market was basically flat, people made very little money in the market, and then fast forward to 2008 and ’09, when the markets were down 30 percent, and people continue to be nervous and looking for ways to minimize their risk.
What keeps you awake at night?
The uncertainty. Where are we going, what are tax rates? Where are we going with health care reform? Uncertainty is not good for the markets. Yet on the other and, if you ask people how the markets have done this year, many would say “not that good,” right? Well, actually, a balanced account of 60-40, a balanced account of stocks and bonds and alternative assets, has returned between 8 and 9 percent this year. Many people are surprised by that just because the mood is not good around the overall concern about where the economy is going. … And then throw in the European debt crisis – all of that creates a mood of uncertainty and pause for our clients.
What must clients avoid doing right now?
Concentrating too much of their wealth on the bond market because with a 10-year treasury at 0.7 percent, when interest rates go up that will hurt their portfolio. They need to continue to invest in the equity markets. We know historically the equity markets will create better return than bonds and fixed income. So our message to clients is to hang in there. Our position today is we’re slightly favorable to stocks versus bonds and other asset classes.
What’s the best thing a client can do for themselves right now?
Trust their investment objective and trust their investment adviser and stay in the market and stay consistent with their investment policies and do not panic. We know that when clients get out of the market, even clients that got out in 2007, they have a very difficult time getting back in. Unfortunately, some get back after the market has run up to new highs and then they are whipsawed again and sell out at low levels. Stay consistent, trust your investment manager – and if you don’t, get a second opinion.