More research = more confusion

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Topic Author
Beanbone
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More research = more confusion

Post by Beanbone »

Hi everyone

I have spent the last month in a dedicated deep study of everything about personal investment. For the first time in my life I have a little savings so my attention has been drawn to it. I'm more confused than when I started.

I have made the decision that the vast majority of my retirement assets will be passively invested, as they have been for some time, in vanguard index funds. But current / future economic uncertainty and future returns have me worried. I guess we should all be saving more, which I have been doing, but my savings is sitting in a bank account with nearly 0% interest, losing money to inflation! Bad future returns, worse current.

I understand there are few answers to my questions, and this should probably be a question for my therapist instead if financial gurus, but here goes:

Do I have to spend my valuable and limited free time not pursuing my life long passions of making art and golfing to instead obsessively study finance and manage my current savings and retirement in the hopeless pursuit of beating the market?

If so, I'm looking at taking a small portion of my current savings and investing in equities with very stable, under valued companies paying increased dividends over time. Great P/e, low payout ratios, no debt etc. I'm also looking at getting a little more active with my retirement allocation and selling some long term bonds for short term bonds (to protect from rising interest rates and inflation)...


I know everyone's situation is different, So here's mine:

Age 44
Married
Income $160k combined income
Savings $60k (saving additional $2-$3k per month)
Own house (have 15 year, 2.75% mortgage with $230k left - home value at $300k)
Retirement: IRA $150k (75 in vangaurd index from roll over, 75 in current employer 403b tiaa cref) + $8k per year contribution (60% stocks 30% bonds 10% real estate) + wife's teacher pension


should I stick with art and golf, and just save in index funds?
Last edited by Beanbone on Tue Jan 08, 2013 8:22 pm, edited 1 time in total.
Johm221122
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Re: More research = more confusion

Post by Johm221122 »

Try Bogleheads philosophy
http://www.bogleheads.org/wiki/Boglehea ... philosophy
Welcome to forum
john
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stevewolfe
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Re: More research = more confusion

Post by stevewolfe »

Don't make it hard. Read the link Johm221122 posted above. Remember - the only way to have a perfect allocation is in hindsight. Don't sweat the small stuff. Set an allocation, get in the regular habit of saving. Then go enjoy yourself.
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Aptenodytes
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Re: More research = more confusion

Post by Aptenodytes »

You are studying the wrong things.. Ditch what you've been reading and spend time here.

Your question has an obvious and easy answer-- no.
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

Thanks for the help. I think I'll just except 0% for short term, and buy some more short term bonds.
Default User BR
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Re: More research = more confusion

Post by Default User BR »

You can do a bit better on your "savings" (I assume you mean emergency fund). Some banks are offering around 1%.

Even if you spent the time to study all that, it's not likely that you will be able to apply it to "beating the market". As the others have said, make a plan and stick to it.


Brian
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nisiprius
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Re: More research = more confusion

Post by nisiprius »

Beanbone wrote:Do I have to spend my valuable and limited free time not pursuing my life long passions of making art and golfing to instead obsessively study finance and manage my current savings and retirement in the hopeless pursuit of beating the market?
No. Why do you think you need to beat the market?
should I stick with art and golf, and just save in index funds?
Yes. Then you can relax, knowing that you are tying the market.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Topic Author
Beanbone
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Re: More research = more confusion

Post by Beanbone »

I just read something on I savings bonds. Seems like this is a good place to park cash
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papito23
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Re: More research = more confusion

Post by papito23 »

KISS

I was similarly overwhelmed when I first found this forum, and I made some hasty decisions that lowered expense ratios but added complexity and increased my sector risk.

If you are already pretty tax efficient and are still saving a lot, debt free, etc, maybe make a few measured steps towards a Three Fund Portfolio in the coming days/weeks. Then don't stop by for another 6 months. See how you feel then, perhaps finish the deal towards a 3 Fund.

Easy to say... but here I am still obsessively posting/reading one year later. I suppose posting poor advice is a substitute for actual portfolio tinkering?
A thing is right when it tends to preserve the integrity, stability, and beauty of the biotic community. It is wrong when it tends otherwise. -Aldo Leopold's Golden Rule of Ecology
pkcrafter
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Re: More research = more confusion

Post by pkcrafter »

Beanbone wrote:Hi everyone

I have spent the last month in a dedicated deep study of everything about personal investment. For the first time in my life I have a little savings so my attention has been drawn to it. I'm more confused than when I started.

Ok, but what are you reading, and what is it specifically that is confusing you?

I have made the decision that the vast majority of my retirement assets will be passively invested, as they have been for some time, in vanguard index funds.

This is a good decision.

But current / future economic uncertainty and future returns have me worried.

Everyone is worried, but we stay with our plan! The time to be really worried is when things seem to be going exceptionally well.

In fact, I just listened to a recent bogle interview where he forecasts 1% long term returns for the broader markets.

Do you have a reference for this?

I guess we should all be saving more, which I have been doing, but my savings is sitting in a bank account with nearly 0% interest, losing money to inflation! Bad future returns, worse current.

Not good. You have a need to take some long term risk, even if it's conservative because you appear to be underfunded for retirement at your age.

I understand there are few answers to my questions, and this should probably be a question for my therapist instead if financial gurus, but here goes:

Actually, we should be able to answer all your questions.

Do I have to spend my valuable and limited free time not pursuing my life long passions of making art and golfing to instead obsessively study finance and manage my current savings and retirement in the hopeless pursuit of beating the market?

Investing is simple, but not easy. That's a Warren Buffett quote from Larry Swedroe's book, "Think, Act, and Invest Like Warren Buffett." It's a short book and I suggest you give it a try. The simple part is the actual investing, the not easy part is discipline. the answer to your question is, of course you don't need to spend all your time on "the hopeless pursuit of the market." Once you get the basics down and prepare an investing policy statement, you won't spend much time on investments at all.

If so, I'm looking at taking a small portion of my current savings and investing in equities with very stable, under valued companies paying increased dividends over time. Great P/e, low payout ratios, no debt etc. I'm also looking at getting a little more active with my retirement allocation and selling some long term bonds for short term bonds (to protect from rising interest rates and inflation)...

No, that's not what we would advocate and certainly not what you should do for several reasons, one being time spent on investments.

I know everyone's situation is different, So here's mine:

Age 44
Married
Income $160k combined income
Savings $60k (saving additional $2-$3k per month)
Own house (have 15 year, 2.75% mortgage with $230k left - home value at $300k)
Retirement: IRA $150k + $8k per year contribution (60% stocks 30% bonds 10% real estate) + wife's teacher pension

Vanguard funds in the IRA? You mean 8k total for the two of you? Do you have a company retirement plan?


should I stick with art and golf, and just save in index funds?
Yep.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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mephistophles
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Re: More research = more confusion

Post by mephistophles »

Stick with art. Give up golf.
Topic Author
Beanbone
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Re: More research = more confusion

Post by Beanbone »

thanks everyone. Paul - Here is the link to the Bogel interview - http://www.morningstar.com/Cover/videoC ... ?id=571369

I was wrong. He didn't say 1% real growth. This was someone else, sorry for the confusion!
Topic Author
Beanbone
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Re: More research = more confusion

Post by Beanbone »

Hi Paul -

A follow up to some of your questions concerning my financial situation below. Yes, all $150K of the IRA is in vanguard. I also have a company match that I'm maxing out and this comes in at about $8K per year additional savings. My wife also has a teachers pension that will cover about 50% of our retirement needs. Information is below.

I have been told to save even more, but some have suggested that paying down the mortgage with my savings is a better approach than putting more into IRA's. Any recommendations here would be a great help!

Age 44
Married
Income $160k combined income
Savings $60k (saving additional $2-$3k per month)
Own house (have 15 year, 2.75% mortgage with $230k left - home value at $300k)
Retirement: IRA $150k + $8k per year contribution (60% stocks 30% bonds 10% real estate) + wife's teacher pension
Mudpuppy
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Re: More research = more confusion

Post by Mudpuppy »

pkcrafter wrote:
Beanbone wrote:I guess we should all be saving more, which I have been doing, but my savings is sitting in a bank account with nearly 0% interest, losing money to inflation! Bad future returns, worse current.

Not good. You have a need to take some long term risk, even if it's conservative because you appear to be underfunded for retirement at your age.
I'd have to disagree with this. Risk should be based on what you can tolerate, not how "far behind" one is from retirement goals. If one is falling behind on goals, it's time to investigate the spending to see if one can spend less and save more, not ratchet up the risk. It's also hard to say if they are behind without knowing the details of the pension for Beanbone's wife.

There are however pretty simple, low-risk, ways to get the bank account savings into a higher yield. Beanbone can keep about 5-10k in the bank account as a cushion for everyday expenses and put the rest into one of the many high-yield savings accounts or, if the money is okay being tied up for one year, up to 40k of it can be put into iBonds (10k each for him, his wife, his trust and her trust).
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Re: More research = more confusion

Post by Mudpuppy »

Beanbone wrote:I have been told to save even more, but some have suggested that paying down the mortgage with my savings is a better approach than putting more into IRA's. Any recommendations here would be a great help!
...
Own house (have 15 year, 2.75% mortgage with $230k left - home value at $300k)
Some just have a philosophical belief in paying off all debt, regardless. In your case, I don't think you need to worry about paying down the mortgage any faster since it's such a short term at such a low interest rate. You'll have it paid off before the typical retirement age as long as you don't go adding more debt such as by getting a larger house or doing a massive renovation. I'd focus more on the retirement savings. For example, your wife could start an IRA too, or see if her school has voluntary retirement plans (e.g. 401k, 403b, 457b, etc).
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ofcmetz
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Re: More research = more confusion

Post by ofcmetz »

Beanbone wrote:
should I stick with art and golf, and just save in index funds?
Yes Yes Yes ^ Find an allocation that you can live with and invest in low cost index funds. Save a reasonable amount and live your life. Don't check the portfolio value very often and you will not be bothered to much by the ups and downs. When you need encouragement stop on by the bogleheads.org and get some.

Almost all of what we see and read in the news is counterproductive to being a successful investor. It not possible to consistently time the market. It is much better to just try to earn what the market earns minus fees. The main learning comes from reading and absorbing the wisdom of wise investors though books. I highly recommend the boglehead reading list on the wiki. The best book to start with in my opinion is The Bogleheads Guide to Investing which is written by three of the posters here.

http://www.bogleheads.org/wiki/Books:_R ... nd_Reviews
Never underestimate the power of the force of low cost index funds.
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ofcmetz
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Re: More research = more confusion

Post by ofcmetz »

Beanbone wrote:I just read something on I savings bonds. Seems like this is a good place to park cash

There are numerous threads as well as part of the wiki dedicated to I Bonds. They are a decent choice for part of your cash or bond portfolio. Just make sure you understand exactly how they work before you jump in.

Here is a recent one with some very good posts by Nisi

http://www.bogleheads.org/forum/viewtop ... 1&t=108358
Never underestimate the power of the force of low cost index funds.
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Aptenodytes
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Re: More research = more confusion

Post by Aptenodytes »

Beanbone wrote:Hi Paul -

A follow up to some of your questions concerning my financial situation below. Yes, all $150K of the IRA is in vanguard. I also have a company match that I'm maxing out and this comes in at about $8K per year additional savings. My wife also has a teachers pension that will cover about 50% of our retirement needs. Information is below.

I have been told to save even more, but some have suggested that paying down the mortgage with my savings is a better approach than putting more into IRA's. Any recommendations here would be a great help!

Age 44
Married
Income $160k combined income
Savings $60k (saving additional $2-$3k per month)
Own house (have 15 year, 2.75% mortgage with $230k left - home value at $300k)
Retirement: IRA $150k + $8k per year contribution (60% stocks 30% bonds 10% real estate) + wife's teacher pension
Your savings rate seems low, so I would not counsel speeding up the mortgage payoff. You are already on track to be mortgage-free by age 59 and have a low rate. Instead of putting extra money into the mortgage put more money in your retirement portfolio.
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

you guys are very helpful. thanks again!

What's incredible is I did a "retirement plan analyses" with TIAA-CREF (my current 403b), and they told me I'm on track, but I dug deeper and found they are assuming 10% returns on investments over the next 20 years! Seems pretty optimistic to me. Another bit of optimism is the $46,000 per year that my wife should receive for her NJ teachers pension. My guess is both of these numbers will be reduced as we could expect more like 7% returns in the market and my wife's pension program is nearly broke.

Keep in mind, I'm looking at working through retirement (fun stuff - art on the side), and making $20K a year at this. But, my goal now is to double my savings from about $8,000 per year to $16,000 per year and plow this into vanguard index funds via ROTH IRA's.
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Clearly_Irrational
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Re: More research = more confusion

Post by Clearly_Irrational »

As a rough estimate:

Your current expenses are about 68k/year, but we only need to use 34k since you've stipulated that your wife's pension covers half.
You can deduct another 18k for mortage being paid off and say 19k for SS so your overall retirement requirement is -3k/year at your current lifestyle.
If everything goes well you won't need any additional savings.

Assuming things go badly in that your wife's pension doesn't pay and that SS is unavailable then you'll need 68k-18k or 50k/year.
You're saving roughly 38k/year (using the middle of the range you specified)
You have 21 years before age 65
You should end up with roughly 1.22 million after inflation
At a 4% withdrawal rate that would produce 48k a year so you're 2k/year short. (not counting taxes)

Savings of around another $32k a year would do it.

The details and accuracy of the above is pretty weak, but in general it looks like you might have some work to do in the worst case scenario. I recommend doing a much more comprehensive analysis.
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

Thank you clearly!
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ruralavalon
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Re: More research = more confusion

Post by ruralavalon »

Beanbone wrote: Do I have to spend my valuable and limited free time not pursuing my life long passions of making art and golfing to instead obsessively study finance and manage my current savings and retirement in the hopeless pursuit of beating the market?
. . ..
should I stick with art and golf, and just save in index funds?
Just stick with broadly diversified low cost index funds, ignore the financial news channels, and enjoy art, golf and the rest of your life :) .

Try reading one or two books from the General Investing section of this reading list -- http://www.bogleheads.org/readbooks.htm . It sounds like The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life - by Bill Schultheis, is just the book for you.

Your asset allocation (60% stocks 30% bonds 10% real estate) sounds reasonable to me.

You already seem to understand the importance of a high savings rate.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
wesleymouch
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Re: More research = more confusion

Post by wesleymouch »

Anyone with a State /Municipal pension should assume a partial default. Just like most of us with SocialSecurity have to assume that it will unlikely be paid in full
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ruralavalon
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Re: More research = more confusion

Post by ruralavalon »

You will get better suggestions, and not just scattershot ideas, if you post full details in this format -- http://www.bogleheads.org/forum/viewtopic.php?t=6212 .

What investments do you currently have in your IRA(s)?

You mention increasing your IRA contributions to $16k, but the annual IRA contribution limit per person is $5.5k.

Do you also have a 401k, 403b or similar retirement accounts thru work? If so, what investments are currently in them, and what other investments are offered?

Any other investment accounts? Content?

You can add these details to your original post using the "edit" button, or start a new thread.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
pkcrafter
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Re: More research = more confusion

Post by pkcrafter »

Mudpuppy wrote:
pkcrafter wrote:
Beanbone wrote:I guess we should all be saving more, which I have been doing, but my savings is sitting in a bank account with nearly 0% interest, losing money to inflation! Bad future returns, worse current.

Not good. You have a need to take some long term risk, even if it's conservative because you appear to be underfunded for retirement at your age.
I'd have to disagree with this. Risk should be based on what you can tolerate, not how "far behind" one is from retirement goals.
Mudpuppy, I guess I was not clear, and I didn't know what AA the OP had. I completely agree that an investor should not take more risk than can be tolerated; however, risk comes in different forms. Having no equity greatly increases the risk of loss of spending power. I assumed incorrectly that the OP owned very little stock, but as it turns out, the he holds 60% stock, which is more than enough.

Beanbone, why do you want to put cash into very short term funds rather than put it into your asset allocation of 60/40?

To expand on what clearly_irrational said, to put your savings/assets into perspective, if you wanted to match 160k out of retirement, your wife would contribute 50% with pension and you would have to have about 2M to provide the other 50%. If you wanted to match the 68k spending, she would contribute 34k and you would need about 800k to generate our 34k. Both in today's dollars. If you are saving ~44k/year that is great, but where is it going if you're only adding 8k or even 16k to retirement?

By the way, if you play golf like I do, stick with art. :happy

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Topic Author
Beanbone
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Re: More research = more confusion

Post by Beanbone »

ruralavalon wrote:You will get better suggestions, and not just scattershot ideas, if you post full details in this format -- http://www.bogleheads.org/forum/viewtopic.php?t=6212 .

What investments do you currently have in your IRA(s)?

You mention increasing your IRA contributions to $16k, but the annual IRA contribution limit per person is $5.5k. Isn't this the Roth limit? I was hoping increase my contributions via Roth for my wife and I.

Do you also have a 401k, 403b or similar retirement accounts thru work? If so, what investments are currently in them, and what other investments are offered? I have 1/2 in vanguard index funds and half in tiaa cref.

Any other investment accounts? Content?

You can add these details to your original post using the "edit" button, or start a new thread.
Mudpuppy
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Re: More research = more confusion

Post by Mudpuppy »

Beanbone wrote:Retirement: IRA $150k (75 in vangaurd index from roll over, 75 in current employer 403b tiaa cref) + $8k per year contribution (60% stocks 30% bonds 10% real estate) + wife's teacher pension
There seems to be a little confusion here about account types. You should not be lumping your IRA with your current employer's 403b fund when you are describing both your current balances and your contributions. That is because the contribution rules are different for the two accounts. We can't give the correct advice if we don't know specifically what funds are going to which accounts, and also which account you want to increase contributions in.

Here are the Wiki articles on retirement account types that will hopefully remove the confusion:
http://www.bogleheads.org/wiki/Employer ... s_Overview
http://www.bogleheads.org/wiki/Traditional_IRA
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

Hi

sorry for the confusion. all of my current retirement savings (160k + on going contributions of 8,000 per year) are in a traditional IRA. I'm considering using a Roth IRA in my name and my wife to double my 8,000 contribution on an annual basis.
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Re: More research = more confusion

Post by pkcrafter »

Beanbone wrote:Hi

sorry for the confusion. all of my current retirement savings (160k + on going contributions of 8,000 per year) are in a traditional IRA. I'm considering using a Roth IRA in my name and my wife to double my 8,000 contribution on an annual basis.
You said you were contributing 8k to a TIRA, that's what is causing confusion. 8K is over the contribution limit.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

Got it. My apologies. The 8k is my employer program (403b)
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Re: More research = more confusion

Post by matt.danley »

What is your risk appetite like? 60/30/10 allocation is essentially 70/30 in periods of downturns. Can you hold through a ~30-35% drop in your retirement portfolio if the market drops ~50% again? The reason why most investors don't perform as well as "buy and hold" is because they are incapable of holding through periods of large equity drawdowns. (Which is OK -- I'm one of them) Most investors panic sell at the bottom and euphorically buy on the way up to the top.

I don't have many posts here under my belt, but I feel like we do far too much education on what our allocation should be without adequately judging how each of us react to changes in the market. We all have our limits. You need to find out what yours are and devise a strategy that meets your expectations while staying within your risk settings.

I'm glad you've decided to look into the markets and invested some time in learning about them. No matter how deep you dig (and I've been digging for a while), you always end up with more questions that answers. You can either be upset by that, or embrace the idea that you don't, can't, and won't ever know everything. The markets are the direct manifestations of human psychology; the most chaotic stream of numbers you will come across.

If you want to buy individual stocks that you feel are undervalued by some measure or metric, then do it. But understand position sizing, money management, and stop loss rules clearly BEFORE you buy. Know exactly how much you are risking before you risk any real money. If you want to invest in a "lazy portfolio", but are worried about draw downs, use some simple trend following technique that attempts to keep you on the right side of the market. Not everyone has the stomach to be a buy and hold investor and stay the course. I know I don't! If you can purchase something, close your broker's webpage, go play golf and make art until next year when you purchase again (for annual contributions that is), then go with the 3-4 index portfolio. Easy enough. :)
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Beanbone
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Re: More research = more confusion

Post by Beanbone »

thanks matt.

very interesting self induced psychological test in assessing risk profile. I'm happy to report that I held strong through the crash and did not sell (although, it would have been nice to know more about fundamental valuation back then - I might have sold a little before the downturn). Having said that, I did not have a huge amount in retirement accounts during this time. I can imagine as the balances grow, the pressure to get out during bad times must be excruciating.

I think I'm ok with a fair amount of risk. I do have a minimum of 15 years before retirement, and I'm resigned to not micro managing my portfolio, and hold long positions. We also have a pension (which could be looked at as the low risk portion of our retirement), so I hope to continue to invest in equities more than anything. Having said that, it's VERY difficult to pile $ into them now. I have some cash on hand and it seems like stocks and bonds are over valued. I think I'm going to stay safe until this fiscal cliff stuff passes. I know this is market timing, but I just feel like volatility could be high over the next couple of months...
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