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Four Resolutions to Reach Your 2017 Goals

by Allen S. Roth, Wall Street Journal, December 31, 2016

Looking back at the past year, can you say you did everything to maximize your investment portfolio?

It's easy to get caught up in the daily grind and forget to conduct basic maintenance on your investments or to get led astray by the punditry. But minding your financial fundamentals and ignoring the herd are crucial steps if you want to have the financial independence to do what you want for the rest of your life.

With the new year comes a time for a fresh start in your portfolio. These four simple resolutions are key to achieving your goals:

I will ignore the forecasts and my instincts for both stocks and bonds.

Have you seen some forecasts of the 2017 stock market and interest rates that imply great precision? Unfortunately, no one knows the future and most stock forecasts are on par with a Magic 8 Ball. Sure, the Federal Reserve will likely raise interest rates, but the Fed controls only the overnight rate. Economists have an awful track record of forecasting longer-term rates such as the 10-year Treasury note. I suspect a key reason that investors typically buy high and sell low is that they count on these experts.

Don't listen to them and invest based on your ability to absorb risk.

I will set my allocation based on what I can afford to lose and try to remember the pain I felt on March 9, 2009, when stocks hit bottom before the current bull market.

Research reveals that investors think they can take more risk when stocks are at an all-time high only to turn to cash after a plunge. If that's you, you may have too much risk. Pull out a brokerage or mutual -fund statement from October 2008 to March 2009 and try to remember how you felt.  Look to see if you sold stocks when the half-off sale was going on.

Embrace the pain you felt back then and set your overall allocation between stocks and bonds accordingly.

I will go against the herd and rebalance, which means buying the asset class that has underperformed.

I tell clients that setting an asset allocation is the second-most-important decision they will have to make. The most important decision is committing to stick to it. While the stock market may be unpredictable, human behavior is not. Investors will be predictably irrational, as the namesake book says, and continue to buy after stocks surge and sell after a plunge.

Make a resolution to stick to your asset allocation, recognizing that this requires flipping the script and selling to get back to your target stock allocation after a surge and buying after a plunge. After all, it's better to buy low and sell high than the reverse.

I will remember that fees and returns are inversely correlated. (Ed: the writer is referring primarily to mutual fund load fees and mutual fund operating expenses.)

Sure it feels good to say that the overall return is more important than fees but, in reality, higher fees have resulted in lower investor returns. If, for example, stocks earn 4% above inflation while high-quality bonds earn a real 1%, then a portfolio comprised of half stocks and half bonds may earn a 2.5% real long-run return before fees.

Make a resolution to keep fees low. That includes fund fees and advisory fees.

Summing it Up

As it happens, investing the right way is downright dull. Excitement is a sign you are a speculator rather than an investor. The silver lining, however, is that your portfolio will likely grow faster, getting you to financial independence that much sooner to pursue all the excitement you desire.

So here's wishing you a dull 2017 in investing and an exciting year in most everything else.


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