A common theme I’m seeing in 2012 market forecasts is volatility. Many strategists are expecting stock prices to remain volatile in the New Year. Given the European crisis, concerns about the pace of global economic growth and Washington politics, there is no shortage of uncertainties to fuel volatility.

As investors, we have no control over how fickle Mr. Market is on a given day. However, we do have control over how we react. So, in the spirit of the New Year, here are resolutions to follow.

1. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Take a look at your current holdings and ask yourself what were the exact reasons you bought them. Do you remember? I personally keep a journal, so I don’t have to rely on my memory to cite the exact characteristics of a stock or a fund that attracted me to it.

2. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may outstay their welcome. A set list of criteria for selling a stock, bond or fund can help you identify when a negative trend has emerged and provide you with a plan for action.

3. Have a set schedule for reviewing your portfolio holdings. If you own individual securities, you should plan on reviewing the headlines and other relevant criteria weekly (or daily, if doing so won’t cause you to trade too frequently). Mutual funds and exchange-traded funds (ETFs) can be monitored quarterly.

4. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 70% stocks and 30% bonds, but your portfolio is now comprised of 64% stocks and 36% bonds, adjust it. Move 6% of your portfolio out of bonds and into stocks. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by 5% or more.

5. Review your expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified, however, if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

6. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know they are listed. Finally, be certain those you would depend on to take over your financial affairs have access to the documents they need in the advent of an emergency.

7. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation than you do. So be proactive. Vote your proxy statements, do your research before buying a security or fund, ask questions of your adviser, and be prepared to sell any investment at any given time if your reasons for selling so dictate.

8. Take a deep breath. Often the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared, but it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves.

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

More on AAII.com

• Shadow Stock Portfolio Rules — Don’t have a plan for determining when to buy or sell a stock? Our Model Shadow Stock Portfolio rules can give you ideas for constructing a plan of your own.
• The Portfolio Review: Why It Is Important and How to Do It — Regular portfolio reviews are the foundation of successful investing; here are suggestions on how to do it.
• Do you have an investing resolution for 2012? — If so, tell us on the AAII Discussion Boards.
• AAII Sentiment Survey — Investor Sentiment Turns Positive at Year End.
• Don’t forget to take the AAII Asset Allocation Survey.

The Week Ahead

The U.S. financial markets will be closed on Monday in observance of New Year’s Day.

Six S&P 500 member companies will report earnings next week. They are Mosaic (MOS) on Wednesday; Apollo Group (APOL), Constellation Brands (STZ), Family Dollar Stores (FDO) and Monsanto (MON) on Thursday; and Agilent Technologies (A) on Friday.

The first economic reports of 2012 will be the December ISM manufacturing index, November construction spending and the minutes from the December Federal Reserve Open Market Committee meeting, all of which will be published on Tuesday. Wednesday will feature November factory orders. The December ISM services index and the December ADP employment report will be published on Thursday. Friday will feature December jobs data, including the unemployment rate and the change on nonfarm payrolls.

No Federal Reserve officials are currently scheduled to speak.

AAII Sentiment Survey

Investor Sentiment Turns Positive at Year End

A Santa Claus rally helped to lift individual investor sentiment from a neutral stance to a predominately bullish stance in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, increased 6.9 percentage points to 40.6%. This is a six-week high for bullish sentiment and is above the historical average of 39%.

Neutral sentiment, expectations that stock prices will remain essentially unchanged over the next six months, fell 9.4 percentage points to 28.6%. Neutral sentiment hit a six-year high last week, and this week’s large decline pushed the neutral sentiment reading back below its historical average of 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased slightly by 2.6 percentage points to 30.8%. Bearish sentiment has been above its historical average of 30% six times over the last seven weeks.

Many individual investors are encouraged by the improving domestic economic picture, but remain cautious and concerned about the European sovereign debt problems.

This week's special question asked AAII members if there were any economic or market-related catalysts they might be looking for over the next few months. Most respondents focused on Europe, with bullish investors looking toward a stabilization or semi-resolution of the eurozone debt problems as positive catalysts, while bearish investors expect a breakup of the European Common Market that will hurt the domestic economy and the markets. On the domestic front, a number of respondents cited an improving domestic employment picture, strong consumer spending and an improving housing market as key economic catalysts.

Here is a sampling of the responses:

• “I am looking for the breakup of the European Common Market, which will affect our economy in a negative way.”
• “I think that for the next few months, news from Europe will continue to move the markets in a seesaw fashion. By comparison, important numbers like GDP and employment will have a muted effect.”
• “I am looking for a slowly improving economy and a final resolution to the European debt crisis.”
• “Improvements in unemployment, housing starts, existing home sales, industrial production, energy prices and exports.”
• “A large increase in consumer spending.”
• “An increase in domestic energy production.”

Have a happy, healthy and prosperous New Year,

Charles Rotblut, CFA
AAII Journal Editor