New Year's Resolutions for Successful Investing

January 1st, 2015
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Investing Daily Article of the Week

by Jim Pearce

The day after Christmas - December 26th - is affectionately known as "Boxing Day" in many parts of the world. A holiday of sorts, it is named for the gift boxes that employers would give to their employees. Dating back to the Middle Ages, it's generally believed that these gifts were fairly modest and made to the servants and tradesmen that toiled under much wealthier noblemen.

Follow up:

There may have been a time when the traders and analysts that work for Wall Street investment banking firms were once viewed as little more than subjects of their much wealthier overlords, but those days are long gone. In fact, to a large extent their roles have reversed, as top-tier traders and analysts command enormous salaries and are held in higher regard than the brokers who employ them.

Of course, instead of getting modest presents in gift boxes, these titans of Wall Street receive bonus checks in the millions, even during a down year for the stock market. And with all of the major stock market indexes at or near record highs, this year's version of Boxing Day in lower Manhattan (and outlying suburbs of New Jersey and Connecticut) should be a particularly generous one.

But who is really the giver of these extravagant gifts? Is it their employers, feeling charitable and happily divesting themselves of a small fortune very year to keep these valued employees in the fold? I don't think so. Technically the money comes from them, but in reality the firm acts as little more than a pass-through vehicle, keeping track of the fees and commission income these employees generate and then keeping a portion for themselves before passing on the remainder.

In truth, the givers of these gargantuan-sized bonuses are the investors who supply the capital that ultimately ends up being spent on the products and services those Wall Street firms produce. To be clear, that isn't necessarily a bad thing as the vast majority of them are what keep our world-beating economy humming. But is it really necessary?

It isn't. Ensuring your financial well-being should be your top priority, but you need to take control of your financial affairs in order to do that. As you begin working on your list of New Year's resolutions, there are some things you should resolve to do every year as an investor to ensure that you are doing everything possible to accomplish your financial goals. Here are the "big three" in my book:

First, you really need to understand what you are buying. Although this is said many times, as a long-time financial advisor I can personally attest to the fact that the vast majority of investors I met with had very little understanding of what was in their portfolios. Often a client would ask me to review their "stocks", but all I'd see are packaged products like mutual fund and annuities. When I pointed out that they didn't actually own any stocks at all, their typical response was that they were all the same thing in their mind.

Hopefully you already know that there are many significant differences between stocks, mutual funds, annuities, and all other investment products in terms of cost, liquidity, and tax consequences. If you don't, then that is the first thing you should resolve to do in 2015 before making another investment of any sort. There are a lot of good (and unbiased) books on the subject, so take the time to read one over the holidays. It will be well worth it.

Second, you need to have a clearly defined objective in terms of your investment strategy. More often that not, when I asked clients for their investment objective a typical response was, "Well, I'd like to make as much money as I can." Okay, I think we can all agree on that. But how much risk are you willing to take to achieve that return, and how soon will you need that money? Most importantly, how much of that money are you willing to lose if the market performs badly?

If you haven't given those issues much thought, then I'd suggest you spend a lot of time over the next week thinking hard about which of your financial objectives are "non-negotiable", e.g., being able to pay the mortgage, send your kids through college, etc., and which ones are "nice to haves", e.g., buying season tickets to your local NFL team, taking a cruise every year; and then prioritizing your investment strategy accordingly. A certified financial planner would be a good place to go for that conversation if you don't feel capable of mapping it out on your own.

Third, you should have a single, coherent approach to managing your portfolio so that it doesn't end up becoming a mishmash of stuff you read about on the Internet, heard about from a friend, or was pushed on you by a commission-driven salesperson. There's a chance that may work, but if probably won't. It is virtually impossible to accomplish proper portfolio diversification and risk mitigation if each component of your portfolio is selected independently of the others.

Even though these three things may seem obvious, I'd estimate that about three-quarters of the clients I met with could not honestly say that had achieved all three. In fact, less than half of them had even gotten two of them right. I don't say that to be mean, but to make a point: Knowing what to do, and actually doing it, are often two very different things.

So as you uncork the bubbly next week, resolve to accomplish those three objectives in 2015: understand what you own, have a clearly defined investment strategy, and use a coherent approach to managing your entire investment portfolio. If you can do those three things, it should be a very happy new year indeed.

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