Yes, I am fully aware that there is major economic news due out this morning. The December employment data is likely to be described as “the most important report of the nascent New Year!” or something like that. I do not want to discount that economic data is important—it is, but today’s continuation of our three-part resolution series concentrates on what you need to remember as you review your portfolio.
Perhaps one of the most important questions you should ask yourself is: “should I be handling my own investments?” Notice that I did not ask whether you wanted to do this job, because many investors like the process of investing, but are just not very good at it. It’s OK, really…frankly, it is highly unlikely that I could perform your job very well simply because I enjoy reading your industry’s equivalent to the Wall Street Journal.
I have quoted this research previously, but it is bears repeating: according to reams of research, the average stock mutual fund investor has not performed as well as the S&P 500 index. Research firm Dalbar conducted a survey called “Quantitative Analysis of Investor Behavior” which compared the annualized return for the index versus the average stock fund investor from 1986-2005. During this time frame, the index returned 11.9%, while investors returned 3.9%. An 8% differential is staggering!
The massive gap is understandable considering that so much of investing is driven by the powerful emotions that are difficult to control. That’s why every investor needs a game plan. (If you work with an advisor or broker, you have every right to ask him or her to describe the plan employed by the firm.) These are the three distinctive steps that if followed, should help close the performance gap.
1) Create an investment plan that outlines what you are trying to accomplish. This plan should incorporate your risk tolerance and take into account your time horizon.
2) Prevent your emotions from taking over by creating an asset allocation plan that you periodically check. Yoda recommends that you NEVER alter your plan during the trading day (9:30-4:00), when you might get swept up in the emotions of the marketplace.
3) Integrate your investment plan into your larger wealth management plan. Yes, that means that you need to crunch your retirement numbers, review your estate plan and determine whether you have enough or too much insurance!
Now let’s get on with 2008—there is much work to do!
Friday, January 4, 2008
Thursday, January 3, 2008
Resolution Solution Part 2
It’s that time of year…resolution declarations! While helping you lose weight or stopping your cigarette habit is out of my control, I can help with the ubiquitous, “get my financial life in order!” Yesterday we started by writing down three main goals that you hope to tackle throughout the year, but someone wrote me and said that she had too many and did not know where to start. To help, here are some resolutions that I came up with on last Saturday’s New Year’s edition of the “Making Money” show. Maybe a few of these will resonate with you.
Pay off consumer debt (credit cards, auto loans)
Establish an Emergency Reserve Fund (generally, 3-6 months of living expenses)
Maximize your retirement contributions
Diversify your portfolio holdings across a variety of asset classes
If you are 40-60, calculate your retirement numbers
The next step is to carve out the time necessary to keep track of your progress. Maybe that means that while you are watching football throughout the month, you make sure to review where you are and what you need to do. (We use a proprietary “Financial Check Up” to help keep folks on track.) Or maybe each month when you pay the bills, you remind yourself to check on the investment allocation of your retirement account. Establishing a routine or regular time to address your milestones is an important part of the process. Regardless of when you do it, it is important to make the time you need to track your goals.
If you start the process and feel like you are stalling, that may mean that you need some help. You don't have to be the only one on which the achievement of your resolutions depends. You may want to ask a friend or family member to provide guidance, or perhaps you might turn to a professional like a CFP® or a credit counseling service if debt is your big issue. Seeking assistance is far better than letting the resolution wither away, only to be back on the list next year.
Finally, don’t forget to be kind to yourself during the process. No one is perfect, so it's unreasonable to think that you won't make a mistake or fall back into old patterns temporarily. When you do, don't be too hard on yourself and don't give up. One misstep isn't the end of the world (or the end of your resolution). Keep at it and you are likely to be rewarded both monetarily and emotionally.
Pay off consumer debt (credit cards, auto loans)
Establish an Emergency Reserve Fund (generally, 3-6 months of living expenses)
Maximize your retirement contributions
Diversify your portfolio holdings across a variety of asset classes
If you are 40-60, calculate your retirement numbers
The next step is to carve out the time necessary to keep track of your progress. Maybe that means that while you are watching football throughout the month, you make sure to review where you are and what you need to do. (We use a proprietary “Financial Check Up” to help keep folks on track.) Or maybe each month when you pay the bills, you remind yourself to check on the investment allocation of your retirement account. Establishing a routine or regular time to address your milestones is an important part of the process. Regardless of when you do it, it is important to make the time you need to track your goals.
If you start the process and feel like you are stalling, that may mean that you need some help. You don't have to be the only one on which the achievement of your resolutions depends. You may want to ask a friend or family member to provide guidance, or perhaps you might turn to a professional like a CFP® or a credit counseling service if debt is your big issue. Seeking assistance is far better than letting the resolution wither away, only to be back on the list next year.
Finally, don’t forget to be kind to yourself during the process. No one is perfect, so it's unreasonable to think that you won't make a mistake or fall back into old patterns temporarily. When you do, don't be too hard on yourself and don't give up. One misstep isn't the end of the world (or the end of your resolution). Keep at it and you are likely to be rewarded both monetarily and emotionally.
Wednesday, January 2, 2008
Resolution Solution Part 1
The tradition of the New Year's Resolution dates back to 153 B.C. The Romans named the first month of the year after Janus -- not the mutual fund giant, but the god of beginnings and the guardian of doors and entrances. Janus was always depicted with two faces, one on the front of his head and one on the back, allowing him to look backward and forward at the same time. As a result of the mythical king’s ability to look back on past events and forward to the future, he became the ancient symbol for resolutions.
To honor this tradition of looking back at the old year and ahead to the new, many of us use this time of year as an opportunity to change something for the better…a fresh start. According to my unscientific research, the following often seem to be among the Top 10 of resolutions:
1. Lose weight
2. Stop smoking
3. Get financial life in order
4. Save or earn more money
5. Find a better job
6. Become more organized
7. Exercise more
8. Be more patient at work/with others
9. Eat better
10. Be a better person
Of course I am focused on the third one—achieving order in your financial life. So how can you actually get your financial life in order and make this year’s resolution stick? Old patterns and habits can be so difficult to change, but the task is not impossible. I have learned that it can be overwhelming to try to do too much at once, so pace yourself and do not expect financial nirvana to occur by the Super Bowl. If you know that your New Year's resolution has something to do with organizing your financial life, then you need to break it down from there. Nobody accomplishes anything of significance unless there are specific milestones associated with reaching the major goal.
The first step is to write down three main goals that you hope to tackle throughout the year. This doesn't have to be a complicated master plan -- just brainstorm enough to give you a place to start. Examples may be: “keep track of spending,” “pay down debt,” and “increase retirement funding,” or “calculate retirement need,” “establish a college funding plan,” and “write wills.” Remember, if you are able to accomplish your initial resolutions, you can always add more. Once you have actually written down the big three, put the list someplace that you will see it --- the fridge, a tack board or the office. By doing so, you will have a constant reminder of what you are trying to accomplish, making it more likely that you will hold fast to achieving your resolution. Tomorrow, we’ll tackle more resolutions!
To honor this tradition of looking back at the old year and ahead to the new, many of us use this time of year as an opportunity to change something for the better…a fresh start. According to my unscientific research, the following often seem to be among the Top 10 of resolutions:
1. Lose weight
2. Stop smoking
3. Get financial life in order
4. Save or earn more money
5. Find a better job
6. Become more organized
7. Exercise more
8. Be more patient at work/with others
9. Eat better
10. Be a better person
Of course I am focused on the third one—achieving order in your financial life. So how can you actually get your financial life in order and make this year’s resolution stick? Old patterns and habits can be so difficult to change, but the task is not impossible. I have learned that it can be overwhelming to try to do too much at once, so pace yourself and do not expect financial nirvana to occur by the Super Bowl. If you know that your New Year's resolution has something to do with organizing your financial life, then you need to break it down from there. Nobody accomplishes anything of significance unless there are specific milestones associated with reaching the major goal.
The first step is to write down three main goals that you hope to tackle throughout the year. This doesn't have to be a complicated master plan -- just brainstorm enough to give you a place to start. Examples may be: “keep track of spending,” “pay down debt,” and “increase retirement funding,” or “calculate retirement need,” “establish a college funding plan,” and “write wills.” Remember, if you are able to accomplish your initial resolutions, you can always add more. Once you have actually written down the big three, put the list someplace that you will see it --- the fridge, a tack board or the office. By doing so, you will have a constant reminder of what you are trying to accomplish, making it more likely that you will hold fast to achieving your resolution. Tomorrow, we’ll tackle more resolutions!
Monday, December 31, 2007
One More Day
“One more dawn
One more day
One day more!”
-Les Miserables (music by Claude-Michel Schönberg, lyrics by Herbert Kretzmer and Alain Boublil)
I could not get this song out of my head over the weekend. If you have seen “Les Miserables”, and at this point, I am not sure who has not seen it, you know that throughout the song, the music swells and the action is packed, as the revolution approaches in France and intermission is upon the theater-goers. Well, I am hopeful that there will be no revolution on the horizon, but I am truly looking forward to the end of this year and the beginning of a new one.
2007 has been a wild ride. We should have known from the February swoon that the year would shape up far differently than the preceding one. From the worries about US housing, to the subprime fiasco and the associated financial losses that resulted from the credit crunch and the predictions about recession, I think that investors are flat-out exhausted. In fact, to come through a year like this one and still be able to make money in your retirement and investment accounts feels like a major victory!
As we close the book on 2007, there are some major lessons that you will need to bring with you as you enter 2008. As my father always told me, one of the keys of becoming a seasoned investor is to learn from both the market as a whole and your mistakes in particular. Here are some good nuggets from 2007 to contemplate before turning the page of your calendar to January.
1) Housing values can drop. Gone are the folks who claimed that “real estate never goes down!” 2007 cured anyone of that simple notion.
2) Credit crunches last longer than expected. When we first started to hear about “sub-prime” and “Alt-A” loans, they seemed to be self-contained issues. Clearly, that was not the case.
3) Corporate Execs can be accountable. After the dot-com bubble burst, few CEO’s stood up and took the blame. Both E. Stan O’Neal (Merrill Lynch) and Chuck Prince (Citigroup) not only accepted responsibility directly, they also lost their jobs in the process.
4) The Fed rules. The entire year was spent guessing what the Federal Reserve might do to alleviate the housing recession and the credit crunch. Each time investors thought they knew what would happen, Ben Bernanke and Co. veered in a different direction. Our 2008 wish for the central bankers is that they better coordinate policy action with their interim speeches.
5) Risk matters. When markets rise for long periods of time, investors can become complacent. 2007 forced investors to confront market volatility and the gut checks that resulted from the violent swings allowed many to better understand their personal risk tolerance. Of all of the lessons, this is the most practical one: be honest with yourself about risk and allocate your portfolio accordingly.
With one more day to go, those are just a few of the pearls of wisdom gleaned from 2007. As you look back on the year in your rear-view mirror, you are likely to find many more examples to bring into 2008. Luckily, we all have a day to rest before we start all over again.
HAPPY NEW YEAR!
One more day
One day more!”
-Les Miserables (music by Claude-Michel Schönberg, lyrics by Herbert Kretzmer and Alain Boublil)
I could not get this song out of my head over the weekend. If you have seen “Les Miserables”, and at this point, I am not sure who has not seen it, you know that throughout the song, the music swells and the action is packed, as the revolution approaches in France and intermission is upon the theater-goers. Well, I am hopeful that there will be no revolution on the horizon, but I am truly looking forward to the end of this year and the beginning of a new one.
2007 has been a wild ride. We should have known from the February swoon that the year would shape up far differently than the preceding one. From the worries about US housing, to the subprime fiasco and the associated financial losses that resulted from the credit crunch and the predictions about recession, I think that investors are flat-out exhausted. In fact, to come through a year like this one and still be able to make money in your retirement and investment accounts feels like a major victory!
As we close the book on 2007, there are some major lessons that you will need to bring with you as you enter 2008. As my father always told me, one of the keys of becoming a seasoned investor is to learn from both the market as a whole and your mistakes in particular. Here are some good nuggets from 2007 to contemplate before turning the page of your calendar to January.
1) Housing values can drop. Gone are the folks who claimed that “real estate never goes down!” 2007 cured anyone of that simple notion.
2) Credit crunches last longer than expected. When we first started to hear about “sub-prime” and “Alt-A” loans, they seemed to be self-contained issues. Clearly, that was not the case.
3) Corporate Execs can be accountable. After the dot-com bubble burst, few CEO’s stood up and took the blame. Both E. Stan O’Neal (Merrill Lynch) and Chuck Prince (Citigroup) not only accepted responsibility directly, they also lost their jobs in the process.
4) The Fed rules. The entire year was spent guessing what the Federal Reserve might do to alleviate the housing recession and the credit crunch. Each time investors thought they knew what would happen, Ben Bernanke and Co. veered in a different direction. Our 2008 wish for the central bankers is that they better coordinate policy action with their interim speeches.
5) Risk matters. When markets rise for long periods of time, investors can become complacent. 2007 forced investors to confront market volatility and the gut checks that resulted from the violent swings allowed many to better understand their personal risk tolerance. Of all of the lessons, this is the most practical one: be honest with yourself about risk and allocate your portfolio accordingly.
With one more day to go, those are just a few of the pearls of wisdom gleaned from 2007. As you look back on the year in your rear-view mirror, you are likely to find many more examples to bring into 2008. Luckily, we all have a day to rest before we start all over again.
HAPPY NEW YEAR!
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