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It’s New Year’s! You Know What’s Coming…

By Doug Buchan, CFP®

Ah, New Year’s and the subsequent resolutions that follow is always a fun endeavor.

Lose weight, exercise more, take your multivitamins, quit smoking, drink less – the list can go on and on. From a financial or, more specifically, an investing perspective, the turn of the calendar can also provide an excuse to make some sound resolutions. Just as individuals endanger their long term health with short term bad choices, they also can hamper their long term financial well-being with ill-advised decisions at ill-advised times.

With that, I’d like to provide my top 10 list of resolutions, philosophies and sub philosophies that – if you can adhere to them–will enable you to succeed where most fail, and will greatly increase your likelihood of long term financial and investing success.

1. I will be one of the few to understand that there is a critical difference between having an investment philosophy and having a market outlook. I will accept the timeless investing truth that all successful investors (not speculators or traders but investors) work from a philosophy not an outlook.
   
   
2. I will not confuse my long term strategy with short term outcomes – In other words, I will not stray from a sound investment strategy due to undesirable short term investment outcomes.
   
   
1. Winston Churchill died at age 90, fortified by an ample supply of booze, cigars among other bad habits. Meanwhile, nutrition nut, jogging enthusiast and author Jim Fixx died at 52 of a heart attack. In the financial world, the investor who sunk every penny in Apple stock ten years ago watched their investment multiply by over 40 times, while a globally diversified portfolio only moderately increased. These isolated examples can test our resolve, but it can’t allow us to abandon a proven set of prescriptions that we know provides us with the best probability for health/wealth.
   
   
3. I will distinguish between entertainment with advice. I will acknowledge that the financial media is in the entertainment business. Instead of broadcasting the timeless investment truths (critical to the investor), they broadcast the timely financial news (irrelevant to the investor). Their mandate is to keep viewers glued to their station. This mandate will result in material that is quite counter and potentially detrimental to my long term focus and discipline. If necessary, I will find a healthier channel to tune into other than CNBC (hint – Bloomberg is not a healthier solution).
   
   
4. I will stop hunting for the next 5 star genius money manager, as there are no money manager geniuses. The genius is the person who captures exposure to all the appropriate asset classes in the most cost effective and tax efficient way possible.
   
   
   
5. I will acknowledge that in order to capture the long term returns of equities, I must withstand the short term volatility of equities. Fortunately, over time, equity return premiums (to bonds and cash) come to fruition while equity volatility dissipates.
   
   
1. There have been 13 Bear markets since the end of WWII, averaging a decline of over 30% from peak to trough. The S&P 500 just before the first one stood at 19. Thirteen “end of the worlds” later – and still far below its all-time peak – the S&P 500 stands at about 1,200. Even 30 years ago – before six Bear Markets including the crash of 87’, the tech bubble, the credit bubble and the “lost decade” – the S&P 500 was around 135, about 1/9th of its current value today, NOT including the dividend income received from these investments.
   
   
2. I recognize that the above referenced Bear Market declines cannot be predicted, much less be “timed.” Therefore, the only way I can be sure to capture all of equities’ permanent return is to ride out all of equities’ temporary, albeit sometimes painful, volatility.
   
   
3. I will continue to invest new capital and work my plan, regardless of the apocalypse of the day, because it is time in the market – not timing the market – that matters.
   
   
6. I will take on equity exposure to the extent my financial plan, goals and retirement projections call for it – I will not take on unnecessary financial risk simply for the sake of taking it.
   
   
7. I will not focus my portfolio in a few stocks or even a few asset classes. I will be as broadly diversified as possible as diversification still remains the only free lunch in town.
   
   
8. I will be cognizant and diligent regarding the costs of my investments, as the lower the cost of investing, the more return for me.
   
   
9. I will know and remember the greatest of all investment truths – it is not what my investments do in the long run that determines investment success, it’s what I do. Managing my investor behavior is the number 1 determinant of my investor returns.
   
   
   • Better golfers don’t necessarily hit the greatest numbers of amazing shots, but they absolutely make the least number of really terrible shots. It’s the same with investing – exceptional investing comes about by avoiding the terrible – but terribly common – mistakes.
   
   
   
10. Lastly: I recognize that just as all the best athletes in the world hire personal coaches to keep them focused and disciplined to help them achieve their goals, most investors can probably benefit from having a “financial coach,” to provide them perspective, to keep them on track, to remind them of their New Year’s resolutions and keep them focused on the prize of a more prosperous future.

I passionately believe that if you can adhere to the above principles, you will achieve real life investor returns that far surpass your neighbors, your neighbors’ neighbors, and even their neighbors. More importantly, though, you will live a life in “investment peace,” free from the continuous apocalyptic noise that destroys most investors, and you will have a detailed plan to live out your retirement with the dignity and respect you deserve.

Here’s wishing you and your loved ones a very Happy New Year!

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