Why, as a Canadian investor, should I care about the fiscal cliff?

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Dear Nancy Woods,

All of the recent talk in the financial world is on the fiscal cliff. It is happening in the United States, so why is it of such importance and interest to Canadians?  Should we be worried?  Should I sell everything and sit on cash or buy gold?  Are the talking heads just needing something to talk about? Signed Andrew

Dear Andrew,

With the size of the economy of the United States, anything financial that affects them impacts the world. That's especially true for Canada, because of our proximity and the fact that they are our largest trading partner.

The fiscal cliff that everyone is referring to is the expiration at the end of the year of temporary payroll tax cuts, tax breaks for businesses and various tax changes. U.S. lawmakers have the choice to let the temporary tax breaks expire, modify them and/or renew some of the breaks or extend the existing budget changes as is.

The U.S. government and its two main parties have real difficulty in trying to co-operate. They are trying to reduce their deficit but still spend so they can put more money into the taxpayers hands. Once citizens have the resources and inclination to spend, it will help their economy to grow.  If their economy grows, that will mean their need for our goods and services will increase and in turn put more money into our pockets. This domino effect will mean that we would spend more and buy their products as well.

So, with that very simplistic explanation, hopefully you'll understand why there is such worry in the world. More money means more spending. More spending means growth. Growth means more spending and that spending means more money. Conversely, if there is less money, that means less spending and slower or no growth.  Lack of growth leads to job losses, less money and then less spending.

As an investor, you have to be defensive in your approach because of the uncertainly of the U.S. government's final decision. I wouldn't go as far as telling you to sell everything because in all honesty that would be extreme.  This would be the time to have a clear-headed look at your portfolio and if you use an investment adviser, review what you have for overconcentration of any single holding or sector.

Check for holdings that may be down in value. They may be worth selling to take the loss for tax purposes. You could reduce any already realized capital gains, or if there is not a chance that the investment will recover in price, this may be the time to sell and sit on the cash. Keep in mind, though, that the tax decision should not drive the investment decision.

With so much uncertainty in the markets and world economies, I suggest that you be sure that your investments pay an income if possible. The saying, "get paid to wait" is certainly applicable in times like these.

Gold is often seen as an investment to turn to because of its long history as a measure of wealth. Since it is no longer the monetary standard that countries have to have to back their currency, it should be viewed as a precious metal investment similar to silver and platinum, rather than a currency.

As for your question about the "talking heads," it is their job to report the news and information.  Whether you choose to follow their advice, or mine, is purely your choice.

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Nancy Woods, CIM, FCSI is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc.  To register your interest for an upcoming seminar, "What are the Questions Your Advisor is NOT Asking You?" visit her website nancywoods.com. To ask her a question, send an e-mail to asknancy@rbc.com.