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It's the time of year when
many of us think about establishing one or more New Year's
resolutions. This often means committing to improving our
lifestyle by perhaps exercising more, losing weight, or drinking
less.
Some
investors could probably benefit from resolutions targeting
their financial health as well.
In the same way that many
individuals endanger their health with bad habits, numerous
investors suffer from ill-advised practices in relation to their wealth. Perhaps a set of New Year's
investment resolutions, along with an advisor capable of
helping investors stick to them, will lead to a more
prosperous future.
Everybody wants to be
healthier, and many people want to be wealthier, but neither
is easy. As creatures of habit we discover that
making permanent changes in our behaviour is surprisingly
difficult. We need every assistance
to help us stick to our new commitments; so we establish mental
road signs, such as New Year's resolutions, as behavioural
aids.
To make matters worse, our commitment to change is sometimes
tested by examples of those who ignore prudent behaviour to
their apparent advantage and those who follow it to their
apparent detriment. Winston Churchill lived to age 90,
fortified by an ample supply of champagne, brandy and cigars, while
jogging enthusiast and author of the 1977 best-seller,
The Complete Book of Running, Jimmy Fixx died of a heart
attack at age 52.
In the financial world, the investor who
sank every penny into Apple shares ten years ago watched her
investment multiply over forty-fold while a globally-diversified equity portfolio lost money. These isolated
examples may test our faith but should not encourage us to
abandon a proven set of prescriptions; continuing to apply
sound principles. both in our health and our wealth will still improve our odds.
So, for those who find making such promises useful, here are
ten investment-related resolutions that will hopefully
result in better long-term wealth:
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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. If necessary I will turn off Bloomberg and
turn on the sports channel.
-
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 with
Capitalism, 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 recognise 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 still remains the closest
thing in life 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 behaviour.
-
I will keep my cost of
investing reasonable.
Most of us find it hard to follow a
sensible diet or a sensible investment strategy all 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 your investment capital.
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.
At Locumsgroup we wish you and your family good health
and good wealth in 2011.
Paul Ahearne
Managing
Director
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