Who's Getting Conservative in Advance of the Fiscal Cliff?

In a recent Morningstar.com Discuss forum dialogue about impending tax changes, I noticed that several posters said they expected to buy stocks at a bargain after the upcoming presidential election. So I decided to poke at that a bit more: What investment strategies, if any, are Morningstar.com readers employing in anticipation of the so-called fiscal cliff and election?

Not surprisingly, given that my query touched on politics, partisan bickering--ahem, discussion--was alive and well in the thread. Scandson quipped, "Oh, Christine, I fear you've kicked the hornet's nest." But many other posters stayed on point, focusing on the extent to which current events are influencing how they're positioning their portfolios.

Some posters noted that they are, indeed, positioned conservatively if not downright defensively at the moment; the fact that stocks have run up so much recently makes it easier to take chips off the table in stocks. Others said they're licking their chops to buy into the equity market at reduced prices. Several posters noted that their biggest worry isn't with equities right now but rather with bonds--low yields, high prices, and the prospect of higher inflation following the Federal Reserve's recently announced bond-buying program.

Finally, a healthy contingent of folks are doing their best to tune out the noise and instead are sticking with their carefully laid strategies. To read the complete thread or share your own strategy between now and year-end 2012, click here.

'I Cannot Afford to Lose Money Again Like I Did in 2008'
Several posters noted that they're preparing for a rough ride. Count dave holobaugh among the truly worried: This poster wrote, "Now I am going to almost all cash. I am probably too early, but I cannot afford to lose money again like I did in 2008. I have enough to make it until I die without taking such risks, so I am not taking them no matter what."

Causalresearch also likes cash but is putting an upper limit on it. "For the last year I have been increasing my cash position. It is at the top of my allocation range now, so I plan to do nothing else."

Redhorse, meanwhile, is looking to "metals, miners, emerging currencies, oil companies, and cash for after the implosion."

Vram47 believes that selectivity will reduce equity-related risk. "I weeded out from my portfolio companies that do not have a sound financial position or command a high book value."

Vandy73 is pessimistic but also looking to higher-quality stocks to hold up better than the rest. "Alas, I'm in the safest equities I can find, mostly dividend-paying giants like  Procter & Gamble (PG),  Novartis (NVS),  Johnson & Johnson (JNJ),  Chevron (CVX), and funds like  Scout International ,  T. Rowe Price Mid-Cap Growth (RPMGX),  Vanguard Dividend Growth (VDIGX), and so on."

'We Had a Nice Run'
Many posters are motivated to reduce their equity exposure based on equity valuations and rebalancing considerations more than the expectation of an imminent meltdown. Bondshy wrote, "I went from over 50% equities to less than 40% and invested more in investment-grade bonds. I also lightened up on foreign equities. We had a nice run since May 2012 but there are too many uncertainties are on the horizon. With the Fed doing the heavy lifting and Europe in a heap of trouble, I can't see the market putting in solid gains."

Locking in profits is also top-of-mind for Advis1165, who wrote, "What I have decided to do to hedge my bets is to cash in my big winners this year, instead of next, and dollar-cost average back into the market over the next 12-18 months."

The fact that long-term capital gains tax rates are set to go higher in 2013 provided yet another impetus for Holiday to take chips off the table in stocks. Among other strategies, this poster shared, "I harvested some gains in a taxable account (tax breaks may expire) and bought  Permanent Portfolio (PRPFX) for inflation and possible currency debasement."

Nancyh is also preemptively harvesting gains. "I sold stocks [with Morningstar Ratings for stocks of 2 stars] to reap the gains this year. I will buy back when there is a correction and will have reset basis."

'A Great Buying Opportunity Is About to Happen'
Like many posters, tonyalex95 is scaling back on stocks with the expectation that there will be buying opportunities down the line. "I've lightened up on my equity allocations and added to my cash position. My feeling is that there will be opportunities in the future. The market seems way overvalued given the current state of the economy."

Also ready to pounce is adobe1234. While sanguine that the fiscal cliff situation will be resolved, this poster shared, "If there is a dip, I've got cash ready--waiting for a nice entry point into some high-quality stocks."

Similarly, Nittwit thinks opportunistic investors will be rewarded in the months ahead. "A great buying opportunity is about to happen: good companies at bargain prices. Do your homework now and know what you want to own. Think dividends."

TennBill is also licking his chops. "Let the fiscal cliff come. Stocks will drop like a rock and then swing back up when politicians get organized. By that time, rebalancing will have me loaded up on stocks, ready for the upswing, and I will enjoy the wild ride!"

'Bonds Are Badly Overpriced'
Although many posters noted that they're nervous about stocks' near-term prospects, others said that bonds are more worrisome, particularly given that low yields leave little room for error. DrBobb has been making some changes, but declared, "No new money goes to bonds. Interest rates are at 200-year lows. Bonds are badly overpriced."

For richendric, the best defense in a nervous bond market is a simple one: diversify. "This year I have been increasing my foreign/alternative fixed-income holdings within my overall fixed-income allocation…using developed foreign, emerging market, and high-yield bonds and foreign currency using mutual funds and exchange-traded funds."

LuckyBlackDrago thinks bond buyers ought to be very nervous right now because of inflation worries. "I'm amazed at how many people report investing heavily in fixed-income markets here. Also, lots of people report being heavy on cash. People with that strategy are losing on several sides, while thinking they are protecting their money. Each quantitative easing round is immediately hurting you, although you may not see the bill right away. You will; printing money is not free and sooner or later inflation and devaluation will follow, and all assets denominated in U.S. currency will suffer."

Inflation, rather than the fiscal cliff, is also top-of-mind for BMWLover, who wrote, "The fiscal cliff is a short-term phenomenon that I am forcing myself to look past… Instead, I'm looking at QEi and the inflationary impact that it may very well cause. To be honest, I am scared. If the Fed has its way and it loses control while it tries to inflate us out of this debt crisis, it will only end up devaluing the value of our savings we have worked so hard to create."

'The Fiscal Cliff Is More Like a Fiscal Stairway'
Even as some posters were actively making changes with the expectation of a rough patch, many others are standing pat.

The worries over the fiscal cliff are overblown, in KitCat's view. "I have hopes (or some may call it hopeless optimism) that something will be done about the fiscal cliff. Maybe not everything as I'd prefer it, but I feel 75% will be. Therefore [I have] no plans for any changes at this point."

Sezen13 also argues that worries over the fiscal cliff are overblown. "The fiscal cliff is more like a fiscal stairway, a gradual descent, federal taxes raised a small amount, spending cuts spread over a period of time. Any adverse impact will likely be short, soon swamped by worldwide economic events."

Richardsok pointed out that even though the fiscal cliff is on the minds of many investors today, the biggest market meltdowns are often the ones that no one saw coming. (Amen to that, Richard.) "Bear events often come from totally unexpected directions. Who among us anticipated 9/11 or a housing collapse? In the coming months, while everyone is watching for a fiscal cliff, the market might well be derailed by a Middle East war, a dollar collapse or bond market eruption."

'A Stolidly Strategic Investor'
Several posters scoffed at the notion of repositioning their portfolios in advance of macroeconomic news. GAalleycat's post illustrates the merits of staying disciplined. "I made no other adjustments outside of [re]balancing my portfolio each January following the market drop starting in late 2007. By holding on, I was fully recovered from paper losses by the end of 2010 and am now about 35% higher than my peak portfolio value in late 2007."

Count pandg12 among the investors who are staying the course. This poster wrote, "We're going to ride it out with no changes to our current plan. Our asset allocation has changed very little; we found tweaking can get you in trouble."

Keeping it simple, and strategic, is the mantra for DoItYourSelf, who wrote, "I'm holding at 60-40. I will continue to rebalance no matter what market does. This strategy has worked well in past."

In a similar vein, FidlStix is letting his own anticipated income needs, rather than macroeconomic events, drive his allocations. "As a stolidly strategic investor with a value bent and a long-term focus, I'm not inclined to react to bad macro news. I am, however, making sure my near-term, cash and short-term bond bucket is full with three-plus years of needed funding, since I'm retiring about the same time we would roll off the fiscal cliff."

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