Investments & tat pic

I feel like I am pretty well informed about investing money.  I know the difference between a stock and a bond (FYI: the difference is owning a piece of a company and loaning money), and how bond prices correlate with interest rates (inverse).  I understand, roughly, what the words, large cap, mega cap, small cap and mid cap mean.  I know what a mutual fund is vs. an EFT.  I even have a good handle on compounding interest.  So, why is it that I feel utterly lost when I start reading about managing it without an advisor?

I think the big problem is time.  I am never inclined to act terribly quickly until I am ready...and then I just go!  But, I like to read, research, and feel comfortable with my decision before making it.  This, unfortunately, does not always lead to the best decisions, but I like to believe it leads to more of them than not.  So, when looking into investing, I want a deeper understanding of what I am doing.  Only the market is so complex that it is hard to grasp it's intricacies.  I think that is why so many people, even financial advisors, just use mutual funds.  They dont really have to do or know much other than look at fund performance and understand the mixes inside those funds and try to match them to their investor profiles (or in many cases, just suggest proprietary funds that offer a better financial renumeration for themselves). 

The facts are pretty straightforward, though short term volatile.

1. The longer you are in it for (the longer you have until retirement) the more you should be in the stock market.  Historically, you will find no better return rate.  However, you must be willing to look away when the market tumbles and not panic.  Panic here is the enemy.  If you sell when it is falling and buy when it is rising, you will lose money.  But, it takes a certain kind of intestinal fortitude to buy when everyone else is selling.  I guess you should just think of it like a sale.  "Microsoft is 25% off today!" 

2.  Savings and CDs are a security blanket and nothing more.  They are akin to a raft with a slow leak.  You may make it to the shore, but your raft will be in bad shape.  With the average inflation being over 2.2% over the last decade (http://inflationdata.com/Inflation/Inflation/DecadeInflation.asp) and the average interest rate on savings being less than half that (most less than 25% of that number) you are losing purchasing power.  This is something I know and have a hard time letting go of. 

3.  Investing in precious metals like gold is a fools game (http://www.nber.org/papers/w18759), which is why the real money is in buying it under value (CASH4GOLD) and selling it at market price.  This model of buying for less than something is worth and then selling for what it is actually worth will, of course, work with EVERYTHING.   

4. Your own home is generally not a great overall investment, though it is better than savings:

The ultra-long-term reality is that, according to data from Robert Shiller, the real (inflation-adjusted) return on house prices has been just about 0%, albeit punctuated by some sharp booms and busts along the way. While many have built significant long-term equity in their homes, it has been less about real investing returns and more about the simple result of investing with leverage in something that appreciates at the rate of inflation, and having a mortgage obligation as a form of "forced savings." In addition, living in a personal residence saves the cost of paying rent elsewhere, and that shelter-as-return can ultimately enhance wealth…with the caveat that it must be balanced against the impact of paying mortgage interest (as paying more in mortgage interest than you would have paid in rent can actually result in less wealth, not more).  It should really be viewed as an asset, not an investment for the reasons listed above and the lack of 'liquidity' it offers. 

So, how should you invest your money?  Hell if I know.  Just know that no one else really does either (or at least not the people who will be sharing it with investment magazines, tv shows, or your personal advisor).  The people who have a pretty strong idea are already wealthy and probably gathering even more wealth as we speak.  The rest of us are just trying to guess correctly.  And the major word I hear over and over again is diversification.  Put your acorns in many tiny holes and hope that some of them survive the winter.  In the meantime, strongly consider hollowing out a mattress and filling it with cash, start a successful (though short lived, highly dangerous, and ultimately leads to the destruction of your family) meth empire, or give it to someone who most convincingly feigns to understands any of this but is, for a small fee, somehow willing to share this information with you.  But ultimately, just feel damn lucky you have to consider it all in the first place vs. living in a situation where you are far more focused on the base of the pyramid in Maslow's heirarchy of needs.

Oh yeah, and here is my tattoo: