Thoughts on the "fiscal cliff"

In talking about noisy markets, one could get dizzy trying to ferret out all the talk about the fiscal cliff and what it means to investors. The trader part of me wants to try to time this event, thinking that a good strategy would be to get out of the market in case no agreement is reached. I would then get back in after the sell off has occurred from very nervous investors/traders dumping their holdings at any sign of trouble.  On the other hand, the rationale part of me says that one cannot possibly predict with any degree of certainty what direction this market is headed. This is because no one can accurately predict what the politicians in Washington will do regarding the fiscal cliff leading to rising taxes, and cutbacks in government spending. 

 As for me I have decided to stay put, knowing full well that risk resides in doing nothing, but probably not as much risk as trying to predict what will happen with the fiscal cliff. Any changes I make between now and the end of the year will be in response to long term planning, such as transitioning from individual stocks and investing more in index funds so a broaden my exposure to the market. Making changes in response to long term planning is good for a portfolio as long as one has and is following a well thought out plan. The short-term variety of change (i.e. in response to the fiscal cliff) will generally lead to wrong decisions in either direction, or if one is unlucky, to a wrong decision in both directions.

Introduction

As we come to the end of the year it always is a good time to access our progress with our investment objectives.  Not only should we look at how much our investments have grown (luck or skill) or haven’t grown, but we need to look at our investment philosophy and see if it is helping us meet our objectives and goals toward retiring someday.    

As investors we are bombarded with different messages some saying the old philosophy of “Buy and Hold is dead”, with others telling us that timing the market is a fools errand.  In between these two extremes lie many areas of investment behavior. 

For those of us who started or grew up with the buy and hold philosophy, becoming a very active investor took a lot of courage and a leap of faith as we began to execute many different trades trying to stay ahead of the game.  As an active trader one must be very nimble, visionary, well read and versed, and at times just down right lucky.   On the other hand, as some have experienced twice during the last decade, if one sits on gains long enough a market downturn can soon take them all away.  

Having prepared taxes for many years my bias tells me that of the very active traders that I have become acquainted with, all have lost money on their short term operations, and the only real gains that these investors/traders make is with their long term holdings.  The only money these individuals made was for their brokers as these active traders literally make hundreds if not thousands of dollars for their respective brokers a year.   

It is with this background then that I write these blogs hoping to help some of us to safely navigate a course that will eventually help us retire with some assets in tow and to ferret out what is important and what is just noise in the investment world.