Whether you’re a seasoned investor or a novice, the start of a new year is the time for making investing resolutions. For most people, those goals often amount to vague notions of saving more and investing better.
But with the Standard & Poor’s 500 index gaining 19 percent in 2017 and interest rates rising, your resolutions will need to be realistic and attainable. Historically, stocks performed worse when rates rose than when they fell. From 1966 through 2016, the S&P 500 returned 15.2 percent when rates were falling and only 5.8 percent when rates were rising, says Robert R. Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
Instead of aiming to beat the market or get a certain percentage return, pick goals that are within your control, says James Philpot, associate professor of finance and general business at Missouri State University.
[See: The 10 Best ETFs to Buy for 2018.]
Be specific about what you want to do so that you can’t wriggle out of a resolution easily. For instance, if your goal is to save more for retirement, set a dollar amount or a percentage for increasing your 401(k) contributions in 2018.
Or you might adopt some core investing practices as resolutions, the kind financial advisors are always urging you to do. Here are a few to consider, with the idea that any resolution you stick to long enough might become habit-forming.
Have a big-picture plan. If you don’t know what you’re investing for, you won’t know how to invest, so pick a savings destination and map out a route for getting there.
Are you saving for a down payment on a house in a few years’ time, your child’s college education some nine years away or retirement a quarter century from now? Each will require its own investing plan. “The biggest mistake I see is investors don’t tie their investing goals to their life goals,” says Roger Whitney, a financial planner at WWK Wealth Advisors in Fort Worth, Texas. “Investing is not an end — it is a means to an end.”
That plan should include the returns you need to make to attain your savings goal in the time frame you require. Then tailor your investments for the return you’ll need. Just be realistic with your expectations, says Jason Newcomer, a financial planner with Barber Financial Group in Lenexa, Kansas.
Or perhaps you had a plan, but your life, tax status or risk tolerance has changed. For example, a newly divorced investor may have a lower risk tolerance and a need for a higher income than was the case before the divorce. If so, that person’s plan and investments should reflect the new situation, Philpot says. If necessary, ask a financial advisor for help. “Investing is simple; planning is not,” Whitney says.
Track your net worth every 90 days. If you’re the kind of investor who glances at your portfolio once in a blue moon, try checking in every quarter and then adding up your total net worth. That figure should include not just investing account balances but also cash and other assets as well as liabilities.
Tracking your net worth regularly helps you spot problems, such as the potential for falling short on an investing goal, and could even encourage you to be more disciplined about saving if you tie those quarterly checkups with actionable goals like saving $5,000 in a 401(k) by the end of each quarter. Your net worth “represents the sum of all your financial decisions,” Whitney says. “In many ways, it equals your values. Your net worth cuts through all the stories we tell ourselves about how we’re doing.”
Rebalance your portfolio at least once a year. According to Charles Schwab’s Modern Wealth Index, which surveys 1,000 Americans’ financial habits, less than 40 percent of investors have rebalanced their portfolios in the past year.
[See: 8 Things to Consider When Choosing an Online Broker.]
As already noted, U.S. large caps just enjoyed a strong year, and international markets did even better, up more than 20 percent in 2017. Blockbuster returns like these can knock an investment portfolio out of balance so that it strays from its original allocations and becomes much riskier than people realize, says Rob Williams, director of income planning for the San Francisco-based Schwab Center for Financial Research.
Make sure your portfolio allocations still reflect your goals and risk tolerance, Williams says. “This can be especially important for people nearing or in retirement who might not be able to withstand any sudden volatility.”
Do a market correction fire drill. The stock market typically has a 20 percent correction every 2-and-a-half years, Whitney says. The current bull market hasn’t had a correction in nearly nine years, so now is the time to conduct a market correction fire drill.
Along with rebalancing your portfolio, that fire drill should also include reviewing your portfolio’s level of risk and having ample cash reserves so that you aren’t forced to sell your investments at the worst possible time. If necessary, trim your stock holdings and increase your investment in Treasury bonds to reduce your portfolio’s overall risk.
Stock-heavy portfolios don’t hold up as well in a bear market. Yung-Yu Ma, chief investment strategist for BMO Wealth Management in Portland , Oregon, says an aggressive portfolio of 80 percent stocks and 20 percent Treasury bonds lost an average of 20.03 percent during the past three large market declines in 1974, 2002 and 2008. Portfolios with a more conservative allocation of 60 percent stocks and 40 percent Treasurys only fell about 11.92 percent, on average, during those bear markets, Ma says.
[See: 7 ETFs to Profit From Recent Tax Cuts.]
Turn losses into advantages. Sooner or later, every portfolio has its share of investing losers. Sell them and put them to good use on your annual tax return. For example, if you invest $10,000 in the stock market and it loses 10 percent so that your investments are only worth $9,000, use the $1,000 loss to offset gains from other investments. Up to $3,000 a year in investment losses can be used to reduce taxable income, with any remaining losses carried over to future tax years.
Harvesting losses can also prompt investors to sell underperforming investments or re-diversify overly concentrated stock positions, Williams says. “Tax-loss harvesting is an underappreciated investing strategy,” Williams says. “Investors generally don’t want to sell anything at a loss, but there can be a significant advantage if you have gains to offset.”
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5 Investing Resolutions for the New Year originally appeared on usnews.com
