Special notes: Our offices will be closed on both Monday, December 31, and Tuesday, January 1. The U.S. bond market will close early (2:00 p.m. Eastern Time) on Monday but the stock exchanges will operate on normal hours. All U.S. financial markets will be closed on Tuesday. On behalf of everyone at AAII, have a happy, healthy and prosperous new year. Eat some black-eyed peas on Tuesday for good luck!

Long-term readers know that I like to share my list of investing resolutions near the start of each year. The list started in 2012 and has grown since. This year, I’ve added two new resolutions.

The first one (#8) is to automate basic transactions such as saving and taking required minimum distributions (RMDs). It’s easier to stay disciplined when routine decisions and actions don’t continuously need to be made. As behavioral finance expert Daniel Crosby will explain in the January 2019 AAII Journal, “[Imagine] if you could lock in every January 1—when you’re feeling motivated—the way that you were going to eat and exercise for the rest of the year, those things would just happen if you did nothing. We’d all be in great shape, right?”

The second one relates to values-based investing, such as environmental, social and governance (ESG), as well as giving back to family and society (#19). It was inspired by a magnet my wife keeps on our refrigerator. The magnet quotes Hillel the Elder, a rabbi who lived approximately 2,100 years ago, as decreeing, “You have a solemn obligation to take care of yourself, because you never know when the world will need you.” In terms of investing, one of the ways you can help further the causes you care most about is to put yourself into a position where you are able to act—whether it be financially or through time and effort.

The resolution about protecting your identity (#18) has been updated to include links for freezing your credit files. Freezing credit files is now free with all three credit bureaus. Doing so creates a little extra effort when applying for new loans, but not much. I found the unfreezing/refreezing process to be easy when I applied for a new rewards credit card about a month ago. I simply called the credit card issuer to find out which report I needed to make available to them and temporarily unfroze it.

If this is the first time you’re seeing my annual list of resolutions, I’ll share a bit of guidance. You don’t have to follow every resolution immediately. Read it through and decide what you want to address first. Some of these resolutions can be completed very quickly, some require thought and some won’t be applicable right now but will be very relevant at some point in the future. The key is to stick to them (or any other resolutions you might make) throughout the year. One way to do so is to set up reminders that prompt you to go back and review this list throughout 2019. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

One thing you won’t notice in the list is anything related to expectations of what might happen in 2019. This is because the unexpected can and will happen. Just look at this year (2018): How many pundits told you 12 months ago to put all of your money into a comparatively high-yielding money market account? Even if someone actually did, it was both a lucky call and would have been lousy advice the majority of the time. As we move into 2019, there are identifiable risks—slower global growth, politics (a grab bag covering both the U.S. and other countries), trade (U.S. versus China, Brexit, etc.), monetary policy, a weakening tailwind from the tax cuts, etc.—and risks few are talking about. There is also the potential for upside. Among the things that could go right or at least not as bad as feared are monetary policy, trade (both U.S.–China and/or Brexit) and better-than-anticipated economic and earnings growth. As always, there will likely be events in the coming year that hardly anyone is focusing on or are true surprises.

Though pundits across fields are making forecasts, the future often unfolds in ways we don’t expect it to. This is why long-term thinking is important when investing and instead of making decisions based on what you think might happen.

With that in mind, here is this year’s updated list of New Year’s resolutions for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are. All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who are able to stick with a good long-term strategy in all market environments rather than chase the hot strategy only to abandon it when market conditions change.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best return you can relative to the returns of the financial markets and your personal tolerance for risk.

3. 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 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 the investment. A spiral notebook works great for this.

4. 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 overstay their welcome. A set list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged. A common trait of the AAII portfolios—the Model Shadow Stock Portfolio, Stock Superstars Report, AAII Dividend Investing and VMQ Stocks—is that they all have established sell rules. Again, a spiral notebook works well for this.

5. 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). Those of you who use our Stock Investor Pro screening program can set up custom views to get quantitative feedback on valuations, earnings estimate revisions, price momentum and other key data. If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly.

6. 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 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment 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 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.

8. Automate when possible. (NEW!) A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If doing the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. RMDs can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway (BRK.B) shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

While you are doing this, you should also consider documenting your medical directives. These are your wishes concerning end-of-life medical treatment. CaringInfo has links to advance directives for all 50 states. Even though we are always a day closer to proving that we are immortal, it’s a good idea to cover the bases in case we actually are not.

11. 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 the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency (see resolution #10). While you are at it, also contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

12. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1 (optimal strategy).

13. Never panic. (UPDATED!) Whenever stocks incur a correction (a decline of 10%–20%) or fall into a bear territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later. Contributing to the angst some of you may be feeling given the current market environment, is how contrastingly different 2017 and the years preceding it were. This year (2018) felt volatile because, compared to what we’ve experienced over the previous six years—especially 2017—it was more volatile. The last time the S&P 500 had more daily changes of at least 2% was back in 2011.

As offsetting as this might seem, history suggests that those who endure the volatility are rewarded. Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

14. Don’t make a big mistake. Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop just at the most inopportune time. If you are properly diversified, don’t make big bets on uncertain outcomes, avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

15. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. You are not restricted by market capitalization or investment style. You also never have to report quarterly or annual performance. This means you can invest in a completely different manner than institutional investors can. Take advantage of the flexibility, because doing so gives you more opportunity to achieve your financial goals.

16. 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. 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.

17. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. (I use Dashlane, though there are competitors, such as LastPass.) Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

18. Protect your identity. (UPDATED!) Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

Equifax: www.equifax.com/personal/credit-report-services
Experian: www.experian.com/freeze/center.html
Transunion: www.transunion.com/credit-freeze

19. To help others, invest in yourself first. (NEW!) Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to be financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from. For ESG ideas, see The Next Generation of Socially Responsible Investing in the March 2017 AAII Journal and Identifying and Screening for Vice and Virtue Stocks in the September 2018 AAII Journal.

20. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

21. 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; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4. Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

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.

• Five Steps for Gaining Control of Your Investments and Avoiding Mistakes – Simple actions you can take to focus on the things you can control.
  
• 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 them.
  

• 19 Year-End Financial and Investing Moves – These are actionable steps covering personal finance, estate planning, investing, retirement and taxes to consider taking now.
  
• AAII Journal 2018 Index of Articles – Looking for an article we ran earlier this year? This compilation will help you find it.
  

As noted above, the bond market will close early on Monday (2:00 p.m. Eastern Time), but not the stock market. The U.S. financial markets and banks will be closed on Tuesday in observance of New Year’s Day. Our offices will be closed on both Monday and Tuesday.

Just one S&P 500 member is scheduled to report next week: Lamb Weston Holdings Inc. (LW) on Friday.

The week’s first economic reports will be the December ADP employment report and the December Purchasing Managers’ Manufacturing Index (PMI). Both will be released on Wednesday. Thursday will feature December motor vehicle sales, the December Institute for Supply Management (ISM) manufacturing index and November construction spending. December employment data, including the changes in nonfarm payrolls and the unemployment rate, will be released on Friday.

Two Federal Reserve officials will make public appearances: chairman Jerome Powell on Friday and Atlanta president Raphael Bostic on Friday and Saturday.

Half of individual investors now describe themselves as “bearish” for the first time since 2013. The latest AAII Sentiment Survey shows greater polarization, with neutral sentiment falling to an eight-year low.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded for a second consecutive week, rising 6.7 percentage points to 31.5%. Even with the big increase, optimism remains below its historical average of 38.5% for the 14th time in 16 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, plunged 9.7 percentage points to 18.2%. This is the lowest reading since November 11, 2010 (14.0%). Neutral sentiment remains below its historical average of 31.0% for the eighth time in nine weeks.

Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 3.0 percentage points to 50.3%. Pessimism was last higher on April 11, 2013 (54.5%). The rise keeps bearish sentiment above its historical average of 30.5% for the 12th consecutive week and the 15th time out of the last 16 weeks.

Since we started the AAII Sentiment Survey in 1987, bearish sentiment has only been at or above 50% approximately 60 times. Put another way, this week’s bearish sentiment reading ranks in the top 4% of all weekly readings. Neutral sentiment is also extraordinarily low, ranking in the bottom 100 out of nearly 1,640 weekly results.

Historically, unusually high levels of bearish sentiment have been followed by slightly better-than-median returns in the S&P 500 index over the following six- and 12-month periods. Unusually low levels of neutral sentiment have been followed by worse-than-median returns for the S&P 500. However, it’s important to note that there have been past periods when neutral sentiment was unusually low and bullish sentiment was unusually high.

The survey period runs from Thursday through Wednesday. Reminders to take the survey are emailed to a rotating group of AAII members every Monday. Many AAII members follow long-term strategies and do not alter their strategies in response to the ongoing volatility. However, this is not universally the case, as cash allocations reached a 33-month high last month according to our November Asset Allocation Survey.

Market volatility and worse-than-anticipated returns are influencing individual investors’ outlook for the stock market. Also having an influence are Washington politics (including President Donald Trump and the change in House leadership), tariffs (particularly the ongoing trade war with China), corporate earnings, the Federal Reserve, valuations and concerns about the pace of economic growth.

This week’s special question asked AAII members whether the Federal Reserve should continue to raise interest rates. Respondents were split. Slightly more than two out of five respondents (42%) think the pause button should be hit. Many of these respondents think the Fed should wait to see additional data, that growth is slowing or that there isn’t enough inflation to justify further monetary tightening. Approximately 35% believe more rate hikes are warranted. Many of these respondents think the economy can withstand further increases, inflation needs to be kept in check, rates need to be normalized or that raising rates will create room to respond to future economic problems. Others think rate hikes should continue but at a slower pace. About 13% of all respondents think future changes in monetary policy should be based either on the data or events abroad, as opposed to being based on a preset path.

Here is a sampling of the responses:

• “Yes, but at a slower rate. Inflation is the key. If potential inflation is going higher, then interest rates should rise.”
• “No. Inflation seems to be in check and further increases could cause a recession.”
• “It seems like this would be a good time to pause and wait for more economic data to determine the course of action going forward.”
• “I believe they should watch the domestic and international economic indicators and decide as they go, data driven.”
• “Yes … if they can’t get rates up, they will have no leverage when they actually need to lower rates.”

Bullish: 31.5%, up 6.7 points
Neutral: 18.2%, down 9.7 points
Bearish: 50.3%, up 3.0 points


Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

Archives
December 20, 2018 One or Two Rate Hikes in 2019?

December 13, 2018 An Updated Look at the Yield Curve and Stock Market Volatility

December 6, 2018 The Taxes You May Be Paying on Your Investments

November 29, 2018 What to Do When Gains Are Hard to Come By