Jan 22, 201912:23 PMOpen Mic
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5 investment resolutions for the new year
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The beginning of each new year brings the time-honored tradition of re-evaluating our lives and committing to change. For those interested in changes to their investment approach, there are many simple and generic resolutions that may apply, such as save more, spend less, and develop a long-term plan. But for those who are really serious about becoming better long-term investors, consider adopting the following helpful resolutions.
1. Accept that you don’t know how markets will perform this year and neither does anyone else. Nothing you do will help you control or predict the markets. No one knows whether markets will be positive this year or the next three years. Given that the S&P 500 stock index has been positive 75 percent of years since 1926, it’s a reasonable likelihood that most years are positive. But as in 2018, some years will have negative returns. Accepting this fact is the price investors pay when they hope to gain long-term returns that are higher than cash or bonds. Finally, accept that no one knows which individual stocks will be long-term winners. It’s easy to “see” the winners with hindsight bias, but for every winner there are often many companies in the same industry that, while they appeared similar, crashed and burned instead.
2. Stop listening to the media for market timing or stock picks. Investment magazines and television networks exist for one business purpose: to sell advertising. They do not exist to provide you with actionable investment advice. The talking heads on TV may have long careers on Wall Street, but they have no better idea than you what the stock market will do over the next year or three years. Instead, find an investment philosophy you can be comfortable with and stick with it through the market ups and downs. Then do something more productive with your time instead of watching the market pundits.
3. Focus on what you can control. Since you can’t control what the market does and its associated investment returns, focus instead on things you can control: taxes, mutual fund or exchange-traded fund (ETF) fees and portfolio allocation. An entire article could be written on each of these topics, but here’s generally what to look for:
- Taxes: If you have investments outside of retirement accounts, like IRA and 401(k) plans, then there are multiple strategies to help control taxes. Are any or all of them being utilized in your portfolio? For example, tax-exempt municipal bonds can be used instead of corporate bonds to provide tax-advantaged income. Tax-loss harvesting can be used to sell securities at a loss to offset taxable gains now or in the future. One can own mutual funds that have tax minimization as part of their mandate (most funds don’t).
- Mutual fund and ETF fees: Mutual fund and ETF fees are deducted from the fund returns, so the fees can be somewhat hidden. They can range from a low 0.01 percent fee to more than 2.5 percent, depending on the type of fund. While many fund fees have been lowered over the last decade due to public exposure and criticism, many investors have no idea what they pay in fund fees. Morningstar has concluded that low fund fees are one of the best predictors of long-term investment success.
- Portfolio allocation: How much stock is in your portfolio compared to bonds or other asset classes generally determines your long-term expected return, as well as how much risk you incur and volatility. It’s likely most investors don’t know how much they really have in stocks and other asset classes. As a result, many investors take on more risk than necessary or they realize. This may cause some to become unnecessarily scared out of the markets during a significant decline.