The "Fiscal Cliff." What to do?

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The "Fiscal Cliff." What to do?

Postby Taylor Larimore » Thu Dec 27, 2012 2:07 pm

Bogleheads:

With only four days left until the end of the year, investors are deluged with dire warnings and predictions about the United States plunging over the so-called Fiscal Cliff on January 1st . It is only natural that U.S. stock investors are apprehensive and many are selling their stocks and stock funds.

This is a good time for Bogleheads to be reminded of Jack Bogle's advice in his great book, Common Sense on Mutual Funds:
Stay the course. No matter what happens stick to your program. I've said "Stay the course" a thousand times and I meant it every time. It is the most important single piece of investment wisdom I can give to you."


Question: Do you intend to "stay the course?" (Please avoid political comments.)

Thank you and Happy Holiday!
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Re: The "Fiscal Cliff." What to do?

Postby The Wizard » Thu Dec 27, 2012 2:10 pm

Staying the course, yes.
Recent fractional declines are nowhere close to triggering even a small rebalance into equities.
I was expecting maybe a Really Bad Week, but so far, it's a washout...
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Re: The "Fiscal Cliff." What to do?

Postby ResNullius » Thu Dec 27, 2012 2:16 pm

Staying the course? I see no rational or reasonable alternative. Everyone needs an asset allocation strategy that holds for them, then decide on the funds to use to accomplish that allocation, then stick to it through thick and thin. I think there's going to be a lot of thin coming our way, but buy and hold should get us all through it at least as well if not better than 90% or more of the investing population.
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Re: The "Fiscal Cliff." What to do?

Postby john94549 » Thu Dec 27, 2012 2:17 pm

We should all remember that investors in equities, especially those in low-cost index funds, have had a very good run this year. Periodic "downs" are merely part of the way markets operate.
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Re: The "Fiscal Cliff." What to do?

Postby steve r » Thu Dec 27, 2012 2:17 pm

The Wizard wrote:Staying the course, yes.
...


+1
Background noise. That the government has tax and spend issues is hardly new. Presumably more serious this go around.
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Re: The "Fiscal Cliff." What to do?

Postby NYBoglehead » Thu Dec 27, 2012 2:19 pm

Staying the course! I know several people who sold big time in 2008/2009 and now they've been left out of the market recovery. I cannot imagine how disappointed they must be that their money would have roughly doubled since the darkest days of the financial crisis. Now everyone is pre-occupied with getting in while the market is "too high." You cannot sit on the sidelines, what is the alternative to being in the market?? You simply cannot earn enough interest in the present environment to rely on cash equivalents.
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Re: The "Fiscal Cliff." What to do?

Postby bengal22 » Thu Dec 27, 2012 2:22 pm

While I plan on "holding the course" regarding my asset allocation, I think the inability to solve problems and overall general lack of respect for the business community is forcing me to lower my short and medium term expectations. The financial community does reflect the business condition of the nation and the world.
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Re: The "Fiscal Cliff." What to do?

Postby PacNorWest » Thu Dec 27, 2012 2:29 pm

I spoke with the pharmacist this morning while picking up a script for liptor.
The Liptor copay card for $4.00 isn't valid with Medicare. . .the cost was $15.00 (30 day supply) - so I asked about that and why.
That led to another conversation about how he was going to cut back his hours when the new healthcare plan became effective.

Why is the pharmacist cutting back his hours?
Because it keeps him in a lower tax bracket according to him.
It sounds like diminishing returns for hours worked is in effect.

What does that have to do with the "Fiscal Cliff"? I don't know.
But something is wrong when educated upper income people make decisions like that.

Perhaps someone can explain it to me?
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Re: The "Fiscal Cliff." What to do?

Postby bengal22 » Thu Dec 27, 2012 2:31 pm

PacNorWest wrote:I spoke with the pharmacist this morning while picking up a script for liptor.
The Liptor copay card for $4.00 isn't valid with Medicare. . .the cost was $15.00 (30 day supply) - so I asked about that and why.
That led to another conversation about how he was going to cut back his hours when the new healthcare plan became effective.

Why is the pharmacist cutting back his hours?
Because it keeps him in a lower tax bracket according to him.
It sounds like diminishing returns for hours worked is in effect.

What does that have to do with the "Fiscal Cliff"? I don't know.
But something is wrong when educated upper income people make decisions like that.

Perhaps someone can explain it to me?


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Re: The "Fiscal Cliff." What to do?

Postby baw703916 » Thu Dec 27, 2012 2:35 pm

I hope for a big drop before the first week in January,

That way my 2013 Roth contribution will be able to buy more.
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Re: The "Fiscal Cliff." What to do?

Postby richard » Thu Dec 27, 2012 2:40 pm

PacNorWest wrote:I spoke with the pharmacist this morning while picking up a script for liptor.
The Liptor copay card for $4.00 isn't valid with Medicare. . .the cost was $15.00 (30 day supply) - so I asked about that and why.
That led to another conversation about how he was going to cut back his hours when the new healthcare plan became effective.

Why is the pharmacist cutting back his hours?
Because it keeps him in a lower tax bracket according to him.
It sounds like diminishing returns for hours worked is in effect.

This attitude is often because upper income people don't understand marginal tax rates. They believe if they go into another bracket, all income will be subject to the higher rate, not just the income above the threshold level.

PacNorWest wrote:What does that have to do with the "Fiscal Cliff"? I don't know.
But something is wrong when educated upper income people make decisions like that.

Perhaps someone can explain it to me?

A connection might be that most people don't understand the fiscal cliff, they believe the fiscal cliff means too much debt and government spending, while it actually means the opposite (sharp decrease in spending plus an increase in taxes means a major decrease in the deficit, at least as a first order matter). They also don't understand that the problem is gradual - the economy is expected to get slower the longer the issue exists, rather than getting really bad all at once.

Most people don't have the time or inclination to understand economics, they have too much else going on in their lives.

Yet another reason stay the course is the right strategy.
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Re: The "Fiscal Cliff." What to do?

Postby HonoluluGator » Thu Dec 27, 2012 2:40 pm

I sold equities a few months ago, some due to concern with the cliff (knew it would not be settled by now), and partly because of the concerns about people cashing in long term gains while the 15% long term gains tax was in effect, particularly with Apple.

Only problem is, not sure when to get back in!!!
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Re: The "Fiscal Cliff." What to do?

Postby midareff » Thu Dec 27, 2012 2:42 pm

LOL.. what to do about what? Is something going on?
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Re: The "Fiscal Cliff." What to do?

Postby LadyGeek » Thu Dec 27, 2012 2:44 pm

Excellent timing as usual, Taylor. We have several new members asking about the fiscal cliff. I just pointed them to this thread. Thanks.

(As a reminder: Future Tax Rate Questions are Off Topic Until Congress Acts)
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Re: The "Fiscal Cliff." What to do?

Postby Yipee-Ki-O » Thu Dec 27, 2012 2:45 pm

Nothing other than to do my annual rebalancing in January whenever I get around to it.
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Re: The "Fiscal Cliff." What to do?

Postby effillus » Thu Dec 27, 2012 2:50 pm

Ditto baw703916; I DCA a portion of my Roth over the course of the year and lump sum another portion, so a decline would enable me to buy more shares of Wellesley early on.
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Re: The "Fiscal Cliff." What to do?

Postby pennstater2005 » Thu Dec 27, 2012 3:15 pm

I cringe now every time I hear the word cliff. I need to invest in some good noise canceling headphones.
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Re: The "Fiscal Cliff." What to do?

Postby Beagler » Thu Dec 27, 2012 3:18 pm

richard wrote:
PacNorWest wrote:I spoke with the pharmacist this morning while picking up a script for liptor.
The Liptor copay card for $4.00 isn't valid with Medicare. . .the cost was $15.00 (30 day supply) - so I asked about that and why.
That led to another conversation about how he was going to cut back his hours when the new healthcare plan became effective.

Why is the pharmacist cutting back his hours?
Because it keeps him in a lower tax bracket according to him.
It sounds like diminishing returns for hours worked is in effect.

This attitude is often because upper income people don't understand marginal tax rates. They believe if they go into another bracket, all income will be subject to the higher rate, not just the income above the threshold level.


He might be making his decision base upon other factors:
* Starting Jan. 1, 2013 individuals making more than $200,000 per year (and couples making more than $250,000) will face a 0.9 percent Medicare tax increase on wages above those threshold amounts.
* Those same people face an additional 3.8 percent tax on investment income.
* Under current law, the government charges a tax of 2.9% on wages and self-employment income. For employees, your employer covers half of that tax, and the other half is withheld automatically from your paycheck. That rate will soon be raised to 3.8% for single filers who have earnings of more than $200,000, and for joint filers, the limit is $250,000.

At a certain age, he may feel that taking more time off and giving less to Uncle Sam is an acceptable tradeoff.
Last edited by Beagler on Thu Dec 27, 2012 3:41 pm, edited 2 times in total.
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Re: The "Fiscal Cliff." What to do?

Postby Sidney » Thu Dec 27, 2012 3:23 pm

Question: Do you intend to "stay the course?"

yes ...
I always wanted to be a procrastinator.
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Re: The "Fiscal Cliff." What to do?

Postby peppers » Thu Dec 27, 2012 3:39 pm

In September of 1969, the Chicago Cubs fell off the cliff. I have been desensitized to events ever since.
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Re: The "Fiscal Cliff." What to do?

Postby umfundi » Thu Dec 27, 2012 3:40 pm

Sidney wrote:
Question: Do you intend to "stay the course?"

yes ...

+1

But, also make small corrections. Simplify my portfolio. Shed unnecessary cash accounts. Implement decisions when I make them, not depending on an opinion of external events.

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Re: The "Fiscal Cliff." What to do?

Postby Calm Man » Thu Dec 27, 2012 3:43 pm

The pharmacist reflects what I am hearing from friends. Although well compensated, it is unlikely that the pharmacist (if single) is near the 200K per year that will cost him/her the ACA new taxes. He/she is likely responding to the relatively small increase in rates for all brackets, and is probably cutting off the nose to spite the face.
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Re: The "Fiscal Cliff." What to do?

Postby nisiprius » Thu Dec 27, 2012 3:44 pm

Staying the course, or, at least, no financial moves related to the fiscal cliff.

I want the long-term returns of the assets Invest in. I know how I can get them--"all" I have to do is, duh, hold my assets for the long term. If I yaw and zigzag, I'm just as easy to steer into the iceberg as away from it.

Oh, sure, I'm tinkering with stupid little cash micromanagement, household-budget things--figuring out how much to put into I bonds, how much to put into my wife's Roth, how much to hold in reserve in cash for the bathroom remodeling we're having done, how much for the grandson's 529.

The fiscal cliff may make a lot of niggling medium-size changes in our taxes, etc. It might have consequences for my part-time work, which happens to depend on government contracts; if it does, those consequences will be far larger than anything that happens in my investments.
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Re: The "Fiscal Cliff." What to do?

Postby The Wizard » Thu Dec 27, 2012 3:47 pm

Presently, the general public in the U.S. is in some degree of Fear, Uncertainty and Doubt.
Once the clowns in charge determine what the rules going forward shall be, FUD will dissipate and we will have a REBOUND in stock prices...
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Re: The "Fiscal Cliff." What to do?

Postby frugalhen » Thu Dec 27, 2012 3:50 pm

Spoke to a friend of mine who has been a CFP/Advisor for years. No, I don't have any money with him. I made the comment that for the near term this is going to have to have some effect on the market.

He believes it has already been priced into the market to some degree but would not be surprised for a 10% correction until something passes.

While nobody can predict, I think he is about right. I also think if there was some deal struck we could see a bull market erupt.

Where does it leave me? Tempted to move some to bonds, but will likely weather the storm.
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Re: The "Fiscal Cliff." What to do?

Postby bUU » Thu Dec 27, 2012 3:51 pm

FUD is good for news ratings. :moneybag
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Re: The "Fiscal Cliff." What to do?

Postby richard » Thu Dec 27, 2012 3:51 pm

Beagler wrote:He might be making his decision base upon other factors:
* Starting Jan. 1, 2013 individuals making more than $200,000 per year (and couples making more than $250,000) will face a 0.9 percent Medicare tax increase on wages above those threshold amounts.
* Those same people face an additional 3.8 percent tax on investment income.
* Under current law, the government charges a tax of 2.9% on wages and self-employment income. For employees, your employer covers half of that tax, and the other half is withheld automatically from your paycheck. That rate will soon be raised to 3.8% for single filers who have earnings of more than $200,000, and for joint filers, the limit is $250,000.

At a certain age, taking more time off and giving less to Uncle Sam is an acceptable tradeoff.

Possibly, but it hasn't been that long since income tax rates on wages were as high as they will be in 2013 and since capital gains and dividend rates were as higher then they are scheduled to be in 2013, and we didn't see large numbers dropping out of the labor force as a result.

Some people may work less due to higher taxes and therefore keeping a lower percentage of income and some people may work more due to needing to do so to get the same after tax income. The later effect tends to predominate, but taxes have remarkably little effect on behavior (other than things like taking capital gains just before an increase).

My main point was that many people are confused about economics generally and the fiscal cliff in particular. Making investment decisions based on effects surrounding this is likely a mistake, especially if you are following the crowd, panicking based on headlines and other typical mistakes. I don't have any reason to believe market prices don't reflect all available information.
Last edited by richard on Thu Dec 27, 2012 4:39 pm, edited 1 time in total.
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Re: The "Fiscal Cliff." What to do?

Postby wesleymouch » Thu Dec 27, 2012 3:54 pm

Re: Fiscal Cliff: Do nothing. Hope for stocks to go down so I can get a better buy point.
Also I am cutting back work time so I am taxed less.
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Re: The "Fiscal Cliff." What to do?

Postby ruralavalon » Thu Dec 27, 2012 4:01 pm

Question: Do you intend to "stay the course?" (Please avoid political comments.)

Will stay the course.

I am retired :) , so I couldn't possibly work less.
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Re: The "Fiscal Cliff." What to do?

Postby livesoft » Thu Dec 27, 2012 4:04 pm

[... secret message to insiders deleted ...]

A further help has been all the stock fund dividends that have been paid. I did not automatically re-invest them, so they are sitting in cash. This has increased fixed income portion of the portfolio by about 1%.

When an RBD happens, I will invest according to my IPS and asset allocation plans.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: The "Fiscal Cliff." What to do?

Postby reisner » Thu Dec 27, 2012 4:04 pm

If there is a big drop in the stock market, I'll quickly rebalance by buying. Once things have bounced back, I'll quickly rebalance again and presumably reap some profit. Thus the Boglehead way can "time the market." BTW, I'm far from sure there will be a drop, since everybody knows a deal would be forced by going over the cliff--but of course politicians have proved in the past just how stubborn they can be.
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Re: The "Fiscal Cliff." What to do?

Postby telemark » Thu Dec 27, 2012 4:09 pm

Staying the course. I'm maxing out my 401K and Roth contributions, so a chance to buy stocks on sale would be very welcome.
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Re: The "Fiscal Cliff." What to do?

Postby umfundi » Thu Dec 27, 2012 4:10 pm

reisner wrote:If there is a big drop in the stock market, I'll quickly rebalance by buying. Once things have bounced back, I'll quickly rebalance again and presumably reap some profit. Thus the Boglehead way can "time the market." BTW, I'm far from sure there will be a drop, since everybody knows a deal would be forced by going over the cliff--but of course politicians have proved in the past just how stubborn they can be.


Americans can always be counted on to do the right thing...after they have exhausted all other possibilities. (Winston Churchill)


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Re: The "Fiscal Cliff." What to do?

Postby baw703916 » Thu Dec 27, 2012 4:15 pm

My suggestions for the fiscal cliff:

-Hang-gliding
-Base jumping
-Rock climbing
-Ansel Adams-style photography
-Standing on top of it to watch the sunset.

Seriously, there is no possibility of you knowing more than the market, which has been aware of this and analyzing it for months. Unless you truly have inside information...
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Re: The "Fiscal Cliff." What to do?

Postby STC » Thu Dec 27, 2012 4:16 pm

To properly plan for the fiscal cliff you MUST... stay the course.

This boglehead thing is WAY to boring for our sensationalistic media. Boring works, it just doesn't sell.
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Re: The "Fiscal Cliff." What to do?

Postby webslinger » Thu Dec 27, 2012 4:18 pm

We plan on staying the course.

It is times like these when one can take comfort and solace in having a well though out, long term investment plan consisting of simple, well diversified, low cost funds.

Happy holidays.


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Re: The "Fiscal Cliff." What to do?

Postby abuss368 » Thu Dec 27, 2012 4:21 pm

Jack's advice has served us well.

We intend to practice what Jack preaches and stay the course.
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Re: The "Fiscal Cliff." What to do?

Postby Sbashore » Thu Dec 27, 2012 4:23 pm

ruralavalon wrote:
Question: Do you intend to "stay the course?" (Please avoid political comments.)

Will stay the course.

I am retired :) , so I couldn't possibly work less.


+1
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Re: The "Fiscal Cliff." What to do?

Postby NYBoglehead » Thu Dec 27, 2012 4:24 pm

Regarding the post about the pharmacist, there is a distinct difference between staying the course on the investment side of the house and making the determination that one's work is no longer worth the effort of that work. If the pharmacist no longer feels that additional output provides enough additional income, he won't do it. This is called a rational decision, not cutting off his nose to spite his face.

Stay the course with your investment philosophy.
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Re: The "Fiscal Cliff." What to do?

Postby Leif » Thu Dec 27, 2012 4:29 pm

I'm a bit surprised that is an allowed topic, but since it was posted by Taylor I guess it is.

From what I've heard the worst case, current law applies with no changes, then we have a couple of bad quarters, followed by quarters that are better then if action is taken. IMO, in the short term at least, it has been way over hyped by the media.

Everyone has a guess at what will happen. No one seems to know, however. I see no reason to change my portfolio. I'll just rebalance if necessary, buying low and selling high.
Last edited by Leif on Thu Dec 27, 2012 4:34 pm, edited 1 time in total.
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Re: The "Fiscal Cliff." What to do?

Postby VictoriaF » Thu Dec 27, 2012 4:34 pm

Those facing increased fiscal-cliff taxes should take consolation in thinking of those who will face decreased fiscal-cliff taxes due to furloughs and lay-offs.

Victoria
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Re: The "Fiscal Cliff." What to do?

Postby kenyan » Thu Dec 27, 2012 4:37 pm

Nothing with regards to investing. I may have to re-evaluate our savings rates into various baskets, but that was a certainty anyhow since we just had a second child.

The potential effects on the state of my human capital are far more worrisome to me than any tax or investing phenomena.
Retirement investing is a marathon.
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Re: The "Fiscal Cliff." What to do?

Postby hollowcave2 » Thu Dec 27, 2012 4:40 pm

The "Fiscal Cliff" is a term that the media uses that helps scare you. It's great marketing for ratings and creating news. Even if no agreement is reached by Jan 1, the tax hikes will be a political football that will be immediately addressed. For example, there will be a great public groundswell to cut taxes on the middle class, at the very least. In other words, even though this will cause volatility in the markets, this is a flexible condition that is bound to change. If you decide to get out of the market entirely, you'll miss a major rebound if there's an agreement next year. For the long run, re-assess your risk tolerance and ability to tolerate volatility. I would rebalance to a asset allocation that suits you for the long run so that you don't need to keep jumping in and out of the market every time there's a news story.

As for me, I'm looking forward to remembering the "fiscal cliff" next year in the same spirit as "Y2K" and the "Mayan Apocalypse."

Tune out the noise and stay the course........... this is a basic philosophy.
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Re: The "Fiscal Cliff." What to do?

Postby Tigermoose » Thu Dec 27, 2012 4:41 pm

Staying the course. Per my plan, I'm going to do my portfolio analysis in January and then setup automatic monthly contributions for the year.

Fear of the cliff will add to the risk premium of equities -- further fattening my wallet.
Institutions matter
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Re: The "Fiscal Cliff." What to do?

Postby EyeYield » Thu Dec 27, 2012 4:43 pm

Question: Do you intend to "stay the course?"

Of course, -it won't be too coarse.

Luckily, I just found out that when I transfered my account from full to discount broker, a few funds could not be transferred, because they are not held at the discount broker. Thus I had to liquidate them and now have more cash than necessary. Didn't need the extra capital gains, but that too may turn out to be a blessing.

Hoping for a really bad week or two, since it's more likely than not that there will be a buying opportunity in the near future.

So, like Y2K, the 2008-09 crash and the Mayan event, I'll load up on popcorn and enjoy the show.

(My real fear is that my luck will return to mean.)
"The stock market is a giant distraction from the business of investing." - Jack Bogle
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Re: The "Fiscal Cliff." What to do?

Postby NYBoglehead » Thu Dec 27, 2012 4:44 pm

hollowcave2 wrote:The "Fiscal Cliff" is a term that the media uses that helps scare you. It's great marketing for ratings and creating news. Even if no agreement is reached by Jan 1, the tax hikes will be a political football that will be immediately addressed. For example, there will be a great public groundswell to cut taxes on the middle class, at the very least. In other words, even though this will cause volatility in the markets, this is a flexible condition that is bound to change. If you decide to get out of the market entirely, you'll miss a major rebound if there's an agreement next year. For the long run, re-assess your risk tolerance and ability to tolerate volatility. I would rebalance to a asset allocation that suits you for the long run so that you don't need to keep jumping in and out of the market every time there's a news story.

As for me, I'm looking forward to remembering the "fiscal cliff" next year in the same spirit as "Y2K" and the "Mayan Apocalypse."

Tune out the noise and stay the course........... this is a basic philosophy.


You nailed it. Politics aside, if we go over the "cliff" and all the tax rates go up, I'd say there's probably a 99% chance that there would be a "bipartisan" bill to keep the taxes on the lower ninety-someodd percent of the population at the current (2012) rates. We shall see.
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Re: The "Fiscal Cliff." What to do?

Postby PacNorWest » Thu Dec 27, 2012 4:57 pm

Firstly, thank you for the comments on the high earner pharmacist question.
Second, I'm sorry for wandering off topic with that question.

Staying the course for me.
The time period just before the election was the high water mark for me and I was selling very small amounts going into the election.
(That was just fractional play money to appease my inner gambler.)

It looks like the economy is circling the drain right now. . .probably a good time to start easing back into vehicles that are now undervalued due to the fear in the marketplace.
Exception; If the "throw in the towel" attitude affects a large part of the high earners and independent business owners. . .then the economy might suffer quite badly and I will have made a mistake.
(That's my inner gambler talking again) :oops:
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Re: The "Fiscal Cliff." What to do?

Postby sscritic » Thu Dec 27, 2012 5:00 pm

Leif Eriksen wrote:I'm a bit surprised that is an allowed topic, but since it was posted by Taylor I guess it is.

Taylor is no longer a moderator. He has the same right to break the rules as any of the rest of us. :)

viewtopic.php?p=1490921#p1490921

[Please read the words I wrote, not the words I didn't]
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Re: The "Fiscal Cliff." What to do?

Postby EternalOptimist » Thu Dec 27, 2012 5:02 pm

Am sitting tight like I did in '08 8-)
"When nothing goes right....go left"
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Re: The "Fiscal Cliff." What to do?

Postby livesoft » Thu Dec 27, 2012 5:05 pm

This guy is smiling: TravelforFun :)
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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