New Year’s resolutions are an annual ritual for many, with health-related resolutions among the most common. In the spirit of the season, investors should consider making (and sticking to) 2023 New Year’s investment resolutions to lead a healthier investment life.
The following resolutions may reduce stress and improve investment performance:
1. Go on a “Media Diet.”
The “activity bias” is a common behavioral pattern among investors who closely follow the day-to-day (or minute-to-minute) activity in the markets. Many investors would benefit from finding a healthier balance between being well informed and being overly stimulated by market news.
Investors who struggle to find that balance often trade more frequently than is advisable, leading to adverse performance and tax consequences.
Consuming less business and political news may be a healthy resolution for those who find themselves bingeing on the latest tweets, broadcasts and articles.
2. Spend Less Time in “Echo Chambers.”
Confirmation bias is the tendency to seek evidence that supports preexisting beliefs and to interpret information in a way that supports an existing position. The echo chamber (opens in new tab) that comes from avoiding contrary viewpoints can lead to costly investment mistakes.
Seeking contrary points of view is a necessary step in testing an investment point of view and an important (and perhaps uncomfortable) resolution for 2023.
3. Take an Objective Look at Your Portfolio.
The New Year is a logical time to evaluate your current investment holdings. Some recent winners may have benefitted from a favorable market environment and may not be able to sustain their success. If recent success isn’t sustainable, it may be time to look for opportunities to upgrade the holding to an investment with superior prospects.
The same analysis should be applied to less successful positions. Evaluating whether losing positions are likely to recover is a critical aspect of portfolio management. Oftentimes, recent laggards are tomorrow’s leaders. But some investments that seem cheap today can get a lot cheaper!
In a rapidly changing environment, it is important to be vigilant about winning and losing investment holdings.
4. Ask the Right Question(s).
Investment discussions in January are dominated by forecasts for the coming year. The most common question is: “What do you expect the market to do this year?”
Although the natural impulse is to focus on the one-year outlook, for most investors the focus on a relatively short-term time horizon is counterproductive. Investors should start the year with a budget and investment allocation that takes into consideration known cash needs and an emergency reserve for unexpected cash needs.
Beyond those near-term cash needs, the remainder of the portfolio should be invested in alignment with long-term financial and personal goals. The right questions to ask integrate investments with financial planning objectives, focusing on long-term objectives.
Realistically, once cash needs are taken care of, most investors have time horizons measured in years, if not decades.
The unreliable “crystal ball” for investment performance over one-year periods becomes more reliable over longer periods, making investment planning a less stressful exercise.
5. Read a Book.
The final suggested resolution to start the year is: Read a book! There are several books that provide sound advice about how to be a more self-aware and effective investor.
Daniel Kahneman (opens in new tab) was awarded a Nobel Prize in 2002 for findings that challenged assumptions of human rationality prevailing in modern economic theory. Kahneman’s Thinking, Fast and Slow summarizes decades of research and explains patterns of thinking that influence decision-making.
Investor and Columbia Business School adjunct professor Michael Mauboussin (opens in new tab) has done considerable work on behavioral finance and on assessment of success and failure in investing. Mauboussin’s The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing provides insight into the roles both skill and luck may play in investment success and how to better distinguish between the two.
Making New Year’s investment resolutions may increase the likelihood of long-term investment success. Staying on track with resolutions is easier said than done.
The likelihood of staying on track is higher for people who make themselves accountable for their resolutions, so it may be helpful to put resolutions in writing and keep them in a visible place as a constant reminder.
Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen, or experience. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Daniel Kern is the chief investment officer of TFC Financial Management (opens in new tab). As chief investment officer, he is responsible for overseeing TFC’s investment process, research activities and portfolio strategy. Before joining TFC, Dan was the president and chief investment officer at Advisor Partners, a boutique asset manager in the San Francisco area that managed portfolios for advisers, financial institutions and family offices. He is a contributor to US News & World Report, Retirement Investor.IO and ThinkAdvisor.com and a regular guest on Bloomberg’s Baystate Business.
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