New Year’s resolutions can be important catalysts for personal improvement, and last year’s turbulent markets brought out the most counterproductive instincts for many investors.
The beginning of 2019 offers an opportunity for investors to make New Year’s resolutions that can help investment performance and provide for a less stressful year of investing.
Here are six proven New Year’s resolutions that can help investors meet their goals.
— Be more skeptical
— Go on a media diet
— Spend less time in echo chambers
— Don’t put all your eggs in one basket
— Ask the right question
— Read a book
Be More Skeptical
Policy initiatives and political conflict are major factors influencing investment performance. Unfortunately, much of the debate featured in tweets, headlines and political promises at best is misleading and at worst is blatantly false.
[See: 10 of the Best Stocks to Buy for 2019.]
Neither political party has a monopoly on misleading claims and unrealistic promises. President Donald Trump’s assertion that globalization is the primary cause of lost manufacturing jobs ignores evidence that technological advances make it possible to generate the same level of manufacturing output with fewer workers. Progressive politicians who promise of free college tuition and health care often fail to address the potential impact on economic growth and innovation. Many of the countries that have such generous government-sponsored programs find themselves with slow economic growth and high unemployment.
Looking more deeply into factual data and understanding the trade-offs between different policies would be a good practice to adopt for the year.
Go on a Media Diet
It is hard to avoid the seemingly non-stop flow of business and political news. News junkies are among the most vulnerable to the impulse to trade excessively. Consuming less business and political news is a healthy resolution for those who find themselves binging on the latest tweets, broadcasts and articles.
Spend Less Time in Echo Chambers
Confirmation bias is the tendency to seek evidence that supports preexisting beliefs, and to interpret information in a way that supports an existing position. The echo chamber that comes from avoiding contrary viewpoints can lead to the most damaging investment mistakes. Seeking contrary points of view is a necessary step in testing an investment thesis, and is an important (albeit uncomfortable) resolution for 2019.
Don’t Put Your Eggs in One Basket
Building wealth and keeping wealth typically require a very different investment mindset. Although concentration in a single stock is a common way to build wealth, diversification is a more reliable way to preserve that wealth.
Many advisors suggest capping company stock ownership to between 10 and 15 percent of portfolio value. Investors often own stock positions with significant unrealized capital gains, and may feel locked in because of the tax implications of selling.
Executives often struggle with the “illusion of control,” by overestimating their ability to influence external events. Companies are influenced as much by the actions of competitors and changes in the market as on their own efforts. Owning company stock may be a great way to build wealth and show commitment to a company, but it is possible to have too much of a good thing.
[Read: 4 Smart Investment Moves for Near-Retirees in a Volatile Market.]
A strategy to reduce concentrated stock positions can reduce risk and help investors sleep better at night.
Ask the Right Question
Investment meetings in January are dominated by forecasts for the coming year. The most common question is: “What do you expect the market to do this year?”
It is an irresistible impulse to focus on the one-year outlook, but for most investors the focus on the near-term is counterproductive. The important near-term question should be around cash needs for the coming year, to be secure in having enough liquid asset available to meet know cash needs and to provide for unexpected cash needs.
The more relevant discussion about the investment outlook should be framed around long-term investment expectations and their alignment with financial and personal goals. Realistically, once cash needs are taken care of, most investors have time horizons measured in years if not decades.
The incredibly unreliable directional crystal ball for one-year periods becomes a lot more reliable over longer periods, making planning a more predictable and less stressful exercise. Consequently, perhaps the most important resolution is to think with the long-term in mind and sweat less of the day-to-day volatility.
Read a Book
There are several books that provide sound advice about how to be a more self-aware and effective investor.
Daniel Kahneman was awarded a Nobel Prize in 2002 for findings that challenged assumptions of human rationality prevailing in modern economic theory. Kahneman’s “Thinking, Fast and Slow” summarizes decades of research and explains modes of thinking that influence decision-making.
Investor and Columbia Business School adjunct professor Michael Mauboussin has done considerable work on behavioral finance and on assessment of success and failure in investing. Mauboussin’s “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing” provides insight into the role the role of both skill and luck may play in investment success and how to better distinguish between the two.
University of Pennsylvania professor Philip Tetlock writes about the intersection of psychology, political science and organizational behavior, and is the co-creator of the Good Judgment Project, a multi-year study of the feasibility of improving the accuracy of probability judgments of high-stakes, real-world events. Tetlock’s “Superforecasting: The Art and Science of Prediction” (co-written with Dan Gardner), provides invaluable insight into ways to improve forecasting results.
Making and sticking to New Year’s resolutions may not guarantee investment success in 2019, but may provide for a higher likelihood of long-term success and a lower degree of emotional turbulence along the way.
[See: 8 Questions to Ask Your Financial Advisor During Volatile Markets.]
Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable.
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6 Great Resolutions for Investors originally appeared on usnews.com
