It’s that time of year again when individual investors are eager to wipe the slate clean and so-called experts make predictions sure to go wrong. The slate should not be swept clean but rather used to learn from year-to-year. Many individual investors have yet to learn from mistakes of the past and this has led to lackluster performance.
Use the common mistakes of the past to build your New Year’s resolution for today. Not just a resolution for the coming year but a sound resolution that can be repeated every year. Based on my observance of the average individual investor I have come up with a few resolutions of my own and I feel all investors could benefit from following. They are as follows:
I will try to reduce or eliminate “emotions” from my investment process
I believe all individual investors are emotional. The best long-term investors simply do a better job of managing their emotions. For some reason, individual investors (the ones that are the most emotional) get very angry when it is suggested that they are too emotional when it comes to their investments. Unfortunately, most of the time it is true and this is the single most destructive type of investing.
The data support’s the emotional investing theory. Consider the following data from the Investment Company Institute (ICI):
- In 1999, $505 billion flowed into mutual funds. The market then went on a three year slide.
- In 2002, $27 billon was taken out of stock mutual funds. On March 11, 2003 the market began a 4 ½ year bull run.
- In December of 2008, $20 billion was cashed in and taken out of stock mutual funds. The S&P 500 index now sits nearly 46% higher than its close at the end of 2008.
- In March of 2009, $25.5 billion was once again taken out of stock mutual funds. The S&P 500 index is up almost 64% from its March 2011 close.
It is time to eliminate the emotional element from our investment process. It is also the time to stop relying on those that sell investment products based upon the emotion’s that we exhibit. Only good things can come from this self-examination and making the appropriate changes.
I will only invest in products and strategies that make sense to me
Not every strategy you hear about is meant for your ears. I love CNBC, and I enjoy the excitement that traders come onto air with throughout the day. However, just because I love their enthusiasm does not mean that their suggestions are right for me. I’ll be honest with you. When traders make suggestions throughout the day telling viewers what they are buying and selling, what currencies they are trading and discussing options contracts, it is all Greek to me. So, if it is Greek to me then would it make sense to invest my money based on their suggestions? No. My models have been very successful over the years, and they make sense to me. That is why I created them. Investing in a manner that you are comfortable with and that makes sense to you is something nobody can dispute.
Start understanding what you own, why you own it, and what it is designed to do for you.
I will not chase returns
This may sound like an obvious resolution to make, but believe me, when “emotions” are involved most individual investors follow the herd into the hot investment of the day. For 2 years, every single day I have seen a commercial on television with some investment group pimping gold. I certainly agree that gold and precious metals should be a part of any well-designed portfolio but at a comfortable weighting. Did we learn nothing from past market booms within specific sectors? I seem to remember the same type of investment attitude with technology stocks, internet IPO’s and real estate.
Chasing returns is the most common mistake made by investors inside of their work-related retirement accounts. The first thing investors do each year is look at the list of mutual funds available and scroll down until they find the best performing fund from the previous year. Then, many investors move all of their money into that mutual fund. And we wonder why individual investors are a decade behind where they need to be. I don’t know about you but I would much prefer a diversified approach. A diversified approach would probably lead to reducing your allocation in that top performing fund.
Stop chasing returns.
I will educate myself a little each day
Knowledge is power. There is an entire financial services industry that loves the fact that most individual investors have done nothing to educate themselves. This leads to our reliance on them and the products they sell. If you take the time to educate yourself then you will quickly realize that investing is not “rocket science”.
Investors have invested time and money for their education. They have obtained doctorates, masters, bachelors and associate degrees, or some type of technical training. Why? I believe to have a career and hopefully live a comfortable life. However, we have not done enough to educate ourselves on what to do with the savings we have accumulated.
I do not like to be spoon fed, and I want to know what is in the kool-aid before I have a sip. Sticking to the basics of diversification and asset allocation would have served you quite well. However, if you are waiting for someone in the media to tell you about the basics then you will be waiting a long time.
Asset allocation is boring. It doesn’t sell well. Do you really want to look back someday and discover the wildest ride of your life occurred with your life savings? I sure don’t. It is a ride the average investor does not understand and cannot afford to take.
Take the time to feed your brain a little each day. The internet is full of wonderful resources that will help you understand the world of investing.
I have stuck to these resolutions for over a decade and they have served me well. They may not apply to you, but I have a feeling that many individual investors can benefit from this type of self-examination.
Happy New Year! Good luck everyone.
Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”
