Originally Posted By GANDYDANCER:
If you are nervous, then get out of equities and on a temp basis have your stash in cash. Then when or if the dust settles get back in if the risk is something you can live with.
This is a bad idea for a few reasons:
1. You don't know what the market is anticipating already in terms of the fiscal cliff. You're not the only person who knows this is coming up and millions of people have already factored this information into there portfolio way before you even considered it. The market may have all of the information priced in, or it may not. You don't (and won't) ever know until you're looking at it in retrospect.
2. You don't know when equities will peak or when they will bottom. If you sell now, you could be selling at a significant low compared to prices in 6 months, a year, etc. And you won't know when to buy back in. People wait and wait to find the bottom and never catch it. The result is you don't buy until well after markets have bottomed and have started to recover. Markets recovered about 70% in the 3 years after the 2008 crash, and anyone who was waiting to see what happened with the recession missed those returns.
3. There are several tax implications that go with selling off stock. You create tax liabilities that could be taxed as normal income, or even significant capital gains taxes. Depending on several factors (income, your investment accounts, holding periods, etc), you may be better off letting your investments fall in value with potential to recover, rather than lose that money to taxes permanently.
4. Putting your money in cash right now is unwise. Inflation is going to devalue your cash on hand, but equities in general will keep pace with inflation. The reason is that companies will raise prices (and profits will climb) as inflation moves higher. Your cash will only lose value, but Coca-Cola will be selling $5 cokes and making a fortune.