Advice for investors ahead of the fiscal cliff

How worried are you about the fiscal cliff?

Time for a fiscal cliff countdown: just three weeks until the end of the year, which means just 21 days -- give or take -- until some big spending cuts and tax hikes kick in and maybe pitch us back into recession. A lot of people are on edge, wondering what it all means for the economic recovery everyone so desperately wants. If you're an investor, this must feel like a bad dream. Fearful of the prospect of paying higher taxes on dividends, some investors are taking cover and bailing on their stocks. Dividends are under-performing. So are we spiraling out of control?

Marketplace's senior economics correspondent Chris Farrell says fear of the unknown is partly driving investors' behavior.

"There's a lot of uncertainty. The most important thing for people to remember is come January 1, nothing changes. There's no cliff. It's because if you look at the forecast that the Congressional Budget Office has made about getting a recession in 2013 and the unemployment rate going up to 9.1 percent -- if we don't get an agreement on the fiscal cliff -- that hits in the fourth quarter. That assumes we go through all of 2013 having the same discussion that we're having right now. That, I think is a pretty safe bet, won't happen," says Farrell.

Farrell says investors need to take a look at the stock market, which hasn't fallen apart. There's volatility, he says, but no Armageddon. Plus, Farrell says there hasn't been much movement in interest rates, a measure of how much investors around the world are panicking. He warns that the real danger would be making a rash decision.

"There are some issues for [multi-millionaires] to address. But for most middle class folk, it's their home that's the major asset and then the retirement plan, their 401(k). This fiscal cliff does not have a whole lot of implications for either one, at least on the tax front," he says.

Farrell advises investors to do what they normally would do at this time of year. He says if a worse-than-expected scenario happens, investors will be able to get through it if they have savings.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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