Resolution Solution Part 3

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!