This is about the time of year that I see investors breaking the New Year’s resolutions they formulated in October or September and committed to with solemnity in December. These are the worst kind of broken promises because, ultimately, the person you are hurting most is yourself. Below, the most common breaches and some things you can do about them.
Looking in the rear view mirror
This is the time of year that investors–abetted by mutual fund company advertisements–chase last year’s returns by switching to funds, stocks and asset allocations that did well last year.
I always like to say the reason the windshield is much larger than the review mirror is because the important information lies ahead of you. With the markets more or less flat last year, allocations with more fixed-income fared better. But this year, I believe the S&P 500 will return at least 10% with an even larger total return. That means what worked last year is precisely the wrong allocation for this year. If anything, equity allocations should be over weighted, taking into account age and risk tolerance.
Getting emotional . . . again
Many investors commit to the discipline of regular contributions into a diversified portfolio with a carefully considered asset allocation, only to run when the first bad news arrives or Dow takes a precipitous drop.
So far in 2012 we’ve been blessed with relative equanimity. . . but bad news is out there. A shot fired across the bow of an Iranian frigate near the Straight of Hormuz, failure to extend the payroll tax cut or the arrival of new uncertainties following Greek elections on February 19 may all conspire to undermine your confidence. But how you feel on any given day does not change the facts. However, acting on how you feel will change your circumstances, most likely for the worse, when you are acting on emotion.
Abandoning savings commitments
For several investors, mid-January offers an extra reason not to save: quarterly estimated federal and state tax payments. Bleeding cash and facing holiday credit card bills, many investors fail to follow through on their resolution to build their savings and investments. Many fail to even set up the accounts necessary to meet their commitments.
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There are three possible solutions to for this malaise. First, draw down on a line of credit to meet your commitments. While your “capital accounts” will net out to zero, paying off the line over time might be more palatable and help you reach your commitment. Second, if you make quarterly estimated payments, skip January’s, and put the funds into savings. The penalty and interest will leave you smarting in April, however, the value of your investment over time will, if successful, make the penalty and interest a rounding error. Third, set up automatic withdraws from your checking account. Not very sexy, but they works.
Failure to consolidate
The commitment “to finally get my finances together” entered into so earnestly in the fall, frequently fades in January, when the apparent enormity of the task is at hand. My experience has been that what gets measured gets managed. When it comes to investments having multiple accounts in multiple locations undermines, if not eliminates, your ability to measure how and what you’re are doing.
While there are some things that the financial services industry hasn’t quite mastered–fee disclosure, eliminating conflicts of interest and reigning in the prehensile tendencies of Wall Street chief executives to name a few–moving your money from one firm to another isn’t one of them. Filling out a simple ACAT (Automated Customer Account Transfer) form is all you need to do to say goodbye.
So far 2012 is off to a good start. After four very difficult years, the stars have aligned themselves, if not for spectacular returns, at least for very good ones. It would be a shame to miss out on them for want of a little follow through on New Year’s resolutions.