It’s the beginning of a New Year. Now what? Time to put actions to words. It’s time to get moving on those New Year’s resolutions.
Fran Tarkenton, a football legend and successful businessman, once said, “People don’t change their behavior unless it makes a difference for them to do so.”
Changes That Make A Difference to Your Investments
So, it’s a New Year and a “new you.” Here are some tips to improve your bottom line from investing and make that New Year’s resolution work.
The one thing that you can do to tame your fear/greed or fight/flight response when it comes to investing is this: Control what you can.
By controlling what you can you can stress less about the rest. Too often emotional responses like fear and greed take over and produces investment behaviors that torpedo your goals.
Well, here are three tips that you can use to combat these emotional investment behaviors protect your investment performance from its greatest enemy: You.
- Asset Allocation: Diversification is still the best way to minimize loss and maximize your wealth potential. But this doesn’t necessarily mean simply “Buy-and-Hold.” You don’t have to be the captain going down with the ship in a storm. Know your risk tolerance and recognize that it changes over time. You can and should have a way to flexibly respond to market conditions. A practical approach is incorporating “tactical asset allocation” rules into your overall approach.
- Investment Decision Process: The most successful investors can take a lesson from Kenny Rogers’s “The Gambler.” You got to know when to hold ’em and know when to fold ’em. This is best done not in response to some emotional event or a news story that freaks you out but before you buy. Remember what your mother told you when you went into a crowded room or theater? Know where the exits are. The same holds true for investing. Don’t buy in unless you know what your triggers will be for exiting. This will help lock in a gain or minimize or avoid a loss. Individual investors rarely use a tool that has proven to be a life-saver for this: an Investment Policy Statement (IPS). With an IPS you can outline the process you or your advisor will use for choosing, keeping or selling investments.
- Expenses: There are few things that you can control in life. Expenses in investing is certainly one of them. Understand what you own or will buy and what the costs are. Expenses act like a sea anchor putting a drag on your investments. Your investments have to work harder to overcome the drag. By lowering your expenses you lower the drag. How do you do this? Look under the hood of your mutual funds or private placements or annuities. There are expenses to run each of those. And in the case of mutual funds what’s not reported is the cost of trading those holdings. So mutual funds with high “turnover ratios” have higher costs (up to 0.50% more per year).
Here’s a bonus tip: Get a professional to help you.
Can you do this yourself? Certainly.
Does this mean you do all index funds? Sure you can. (I use them as a core and recommend them).
Do you avoid the help of a professional? I’m biased but I’ll say ‘nope.’ A professional will be able to better assess your risk profile and develop an investment selection process that you can use and stick with longer-term. And a professional will have a better idea of the kinds of things you need in your investment line-up to provide for a better risk-adjusted return.
The odds are that you’ll do better with the help of a professional guide along the way. It’s no different than trying to lose weight or get into shape. A professional will help you develop a plan and keep you on track. And that may mean a better chance you’ll meet your resolutions in the New Year and your goals in the long term.
