January 28, 2013 – Published in the North Bay Business Journal
Judging by the headlines in the financial press, 2012 may be remembered as a year of surprises. Investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. Europe is still in crisis but didn’t implode. U.S. employment is higher than desired but a little lower than expected. The plunge off the so-called fiscal cliff was averted. Doomsday did not arrive on Dec. 21 as some interpreters of the Mayan calendar predicted.
Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that “cult of equity” is dead. Stocks quietly rewarded patient investors with double digit returns — approximately twice as high as the historical averages. For the year, total return for the S&P 500 Index was 16 percent while International Large company stocks returned 17.90 percent.
Clearly, the U.S. and global economy are still in a slow-growth recovery period, but there is some reason to be optimistic that 2013 could be a turning point in the long climb out of the Great Recession. After six years of decline, the housing market appears to have finally bottomed out in 2012. The inventory of homes on the market is down 20 percent or more from a year ago, and sales of existing single-family homes jumped 11 percent in 2012.
At the same time, the National Association for Business Economics is forecasting a slow but steady increase in employment this year, and consumer debt is shrinking. The still-weak global economy seems unlikely to cause gas prices to rise dramatically, and some economists have pointed to the record amount of money parked in Treasuries (hence the low rates), which, if people become more confident in the stock market, could be redeployed into equities and cause prices to rise.
None of this, of course, is guaranteed. But those who ignored the optimistic outlook for 2012, and looked at the headlines instead of the millions of workers who got up every day and went to work to build (or rebuild) the economy, probably regret it today. The same could be true for 2013.
Investing and Planning Resolutions
It’s that time of year when many of us consider one or more New Year’s resolutions. Some investors could probably benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year’s investment resolutions, along with an adviser capable of helping investors adhere to them, will lead to a more prosperous future.
So, for those who find making such promises useful, here are 10 investment-related resolutions that will hopefully result in better long-term wealth:
I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions.
I will stop searching for tomorrow’s star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn’t have to fail.
I will not invest based on a forecast — whether it is mine or anyone else’s. I will recognize that the urge to form an opinion will never go away, but I won’t act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
I will continue to invest new capital and work my plan because it is time in the market — and not timing the market — that matters.
I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn’t done well recently) rather than “unbalance” (i.e., buying more of what’s hot).
I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.
I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
I will keep my cost of investing reasonable.
Most of us find it hard to follow a sensible diet or a sensible investment strategy 100 percent of the time. If you must stray when managing your wealth or well-being, moderation is the key. Chocolate cake is OK, as long as it’s not for dinner every night. Speculating on a stock or two is all right as well, as long as you don’t do it with capital set aside to meet your financial goals.
Finally, just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can probably benefit from having a “financial coach” to remind them about their New Year’s resolutions and keep them on track toward a more prosperous future.