My Investing Resolutions for 2020, Part 1

Since 2012, I’ve shared a list of investing resolutions at the start of each year. As long-term readers know, the list has grown significantly over the years. With the addition of a new resolution this year (share your insights about investing with your family, #11), it now encompasses 22 resolutions. Given the current size, I’m breaking the list into two parts. The first part is shown below; the second part will be in next week’s Investor Update.

Long-time readers know I purposely exclude anything related to what might happen in the new year. While there have been commentaries about how forecasters were way off about 2019, think back to the start of the last decade. If someone told you then that the U.S. would go the entire decade without incurring a single recession, the S&P 500 index would be above 3,200 at the end of 2019 (versus 1,115.10 on December 31, 2010) and the 10-year Treasury note would yield 1.92%, what would your response have been? I’m guessing disbelief, with a high probability of laughter. Yet, this is exactly what happened.

So, rather than trying to assess what’s going to happen, focus on what you control. Each of these resolutions calls for a positive step you can take no matter what the market or the economy is doing.

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 all of them 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 2020. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

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. (UPDATED!) 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 can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to compare your statements from 2019 against those from 2018. Were you selling stocks in 2018 and buying them in 2019? If so, you may be taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

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. Review 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 preset 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. (UPDATED!) 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). If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

I also suggest using our brand new My Portfolio, which will soon be available on AAII.com. This portfolio tracking and analysis tool will give you quantitative feedback on your stocks (valuations, earnings estimate revisions, price momentum, growth and other key data). You’ll also be able to get useful quantitative feedback on your mutual funds and ETFs (returns, expense ratios, portfolio characteristics, etc.)

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. 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 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.

11. Share your insights about investing with your family. (NEW!)  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new in the process.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics your younger relatives (e.g., millennials) might be interested in, consider our latest discount broker guide which includes a comparison of the traditional online brokers versus the newer micro-investing apps.