For the New Year, a 5 Minute Investing Course from the AAII

On this very frigid New Year's Eve I offer this little gift from the AAII, a five minute read with 19 investing resolutions for the New Year.  Hope everyone is staying warm this holiday weekend.


Sun 12-31-17 Marias: AAII 19 Investing Resolutions for 2018

19 Investing Resolutions for 2018 

Thursday, December 28, 2017

Special notes: First, on behalf of everyone at AAII, have a happy, healthy and prosperous new year. Both the U.S. financial markets and our offices will be closed on Monday, January 1, in observance of New Year’s Day. Finally, we are in the process of updating our Tax Guide to reflect the new law. As we make changes, we will publish alerts on the AAII Blog, with a revised tax guide appearing in the March AAII Journal. 

Long-term readers know that I like to share my list of investing resolutions at the start of each year. The list started in 2012 and has grown since. This year, I’ve added two resolutions: one about using a checklist and one about protecting your identity. The checklist resolution was inspired by a book that resonated with me this past summer, “The Checklist Manifesto: How to Get Things Right,” by Atul Gawande (Metropolitan Books, 2009). For those of you with fitness or diet resolutions, I’ll suggest another book from the many I've read over the past 12 months: “The One-Minute Workout: Science Shows a Way to Get Fit That’s Smarter, Faster, Shorter,” by Martin Gibala (Avery, 2017). Despite the gimmicky-sounding title, the workouts are good. (I have a few of them programmed into my iPhone.)

If this is the first time you’re seeing my annual list of resolutions, I’ll share a bit of guidance. You don’t have to follow every resolution immediately. Read it through and decide what you want to address first. Some of these resolutions can be completed very quickly, some require thought and some won’t be applicable right now, but will be very relevant at some point in the future. The key is to stick to them (or any other resolutions you might make) throughout the year. One way to do so is to set up reminders that prompt you to go back and review this list throughout 2018. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

One thing you won’t notice in the list is anything related to expectations of what might happen in 2018. This is because the unexpected can and will happen. Just look at this year: Nobody was predicting the very low level of volatility, the large rise in the S&P 500 or the massive jump in the value of bitcoin. As we move into a new year, expectations are for economic growth to continue. While the new tax bill should provide stimulus, valuations are not cheap. It’s just a matter of time before volatility returns to the stock market (even though we don’t know exactly when). Internationally, Brexit looms with a March 2019 deadline, not to mention the various geopolitical events occurring. Plus, there will likely be events hardly anyone is focusing on currently or are complete surprises.

Though pundits across fields are making forecasts, the future often unfolds in ways we don’t expect it to. This is why it’s important to think long term when investing and not make decisions based on what you think might happen.

With that in mind, here is this year’s updated list of New Year’s resolutions for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are. All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who are able to stick with a good long-term strategy in all market environments rather than chase the hot strategy only to abandon it when market conditions change.
    
2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best return you can relative to the returns of the financial markets and your personal tolerance for risk.
    
3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Take a look at your current holdings and ask yourself the exact reasons you bought them. Do you remember? I personally keep a journal, so I don’t have to rely on my memory to cite the exact characteristics of a stock or a fund that attracted me to the investment. A spiral notebook works great for this.
    
4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A set list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged. A common trait of the AAII portfolios—the Model Shadow Stock Portfolio, Stock Superstars Report, AAII Dividend Investing and the new one I’m developing—is that they all have established sell rules. Again, a spiral notebook works well for this.
    
5. Have a set schedule for reviewing your portfolio holdings. If you own individual securities, you should plan on reviewing the headlines and other relevant criteria weekly (or daily, if doing so won’t cause you to trade too frequently). Those of you who use our Stock Investor Pro screening program can set up custom views to get quantitative feedback on valuations, earnings estimate revisions, price momentum and other key data. If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly.
    
6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more. 
    
7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.
    
8. Create and use a checklist. (NEW!) An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.
    
9. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.
   
   Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway (BRK.B) shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.
   
   While you are doing this, you should also consider documenting your medical directives. These are your wishes concerning end-of-life medical treatment. CaringInfo has links to advance directives for all 50 states. Even though we are always a day closer to proving that we are immortal, it’s a good idea to cover the bases in case we actually are not.
    
10. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency (see resolution #9). While you are at it, also contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.
     
11. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas, while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1 (optimal strategy).
     
12. Never panic. Those who have ignored the headlines, set aside any political biases they may have toward either President Trump or former President Obama and otherwise haven’t buckled at the knees when it seemed as if the current bull might be at risk of ending its ongoing run have profited handsomely. Given that we are currently in an unusually long period of low volatility, it will be useful to remember this resolution when the stock market finally does falter at some (unknown) point in the future. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio.
     
13. Don’t make a big mistake. Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop just at the most inopportune time. If you are properly diversified, don’t make big bets on uncertain outcomes, avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.
     
14. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. You are not restricted by market capitalization or investment style. You also never have to report quarterly or annual performance. This means you can invest in a completely different manner than institutional investors can. Take advantage of the flexibility, because doing so gives you more opportunity to achieve your financial goals.
     
15. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.
     
16. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. (I use DashLane, though there are competitors, such as LastPass.) Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.
     
17. Protect your identity. (NEW!) Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. It’s also a good idea to cover the keypad when typing your passcode into an ATM.
     
18. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.
     
19. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4. Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.