- Posted by Brad Bridgewater
- On January 20, 2017
- investor, mindfulness, tax
There was a time when making wise investment decisions was a much less complicated process. You stashed away some money in your 401(k) and maybe invested in CDs or savings bonds that offered modest but consistent returns.
But modern financial markets and the nearly limitless choices they offer have made investing more complex and raised the stakes attached to the decisions you make. For some people, this complexity can be overwhelming, and they either procrastinate or fully neglect financial and investment planning altogether.
It doesn’t have to work that way. There are small changes you can make as an investor that will not only protect and grow your assets but also let you sleep well at night knowing that your financial life is in order.
1. DON’T LET FINANCIAL MARKETS DICTATE YOUR BEHAVIOR
We’ve all seen breathless ads touting double-digit returns for short-term market trades or currency speculation. The concept of day trading sounds too good to be true because it is! What those ads don’t tell you is that for every successful, profitable transaction, there are likely dozens more that resulted in losses. Not only that, but individuals who invest this way are taking an enormous financial risk with every transaction.
Ask any investor who was nearing retirement in 2008 and left the markets with substantial losses after the crash. Making a long-term decision based on short-term conditions can cost investors hundreds of millions of dollars in the subsequent market rebound.
The other side of this coin is the patient investor who doesn’t let the market dictate his or her investment behavior. Although the long-term trend is upward, even broad markets (as measured by the Dow Jones Industrial Average or the S&P 500) experience cyclical volatility. You don’t want to get caught up in the frenzy of one of those volatile cycles and make the wrong decision based on sporadic market events.
A comprehensive risk assessment – completed with your advisor – will help match appropriate investments to your long-term goals.
2. FOCUS ON THE LITTLE THINGS
When it comes to investing, we’re told to “focus on the big picture” and let the details work themselves out from there. That’s very sage advice when you have a good plan in place, but there are still a lot of “little picture” things you can do to become a better investor in the new year.
One example is utilizing tax loss harvesting (in your taxable accounts) as part of your overall strategy. With tax loss harvesting, you take advantage of opportunities in down markets to offset investment gains with losses, thereby reducing your tax burden and replacing investments that may no longer be appropriate for your portfolio.
You should also consider maxing out your qualified contributions. This is one of the easiest ways to grow assets while reaping the dual benefits of company matches and the tax-advantaged status of these accounts.
Finally, during your annual plan review, take the opportunity to reconsider the role of your financial plan. For many investors, ongoing meetings with advisors focus on investment performance. Your financial plan should not be a fixed document that gets dusted off maybe once a year. Smart investors (and their advisors) understand that the financial plan should be a living, dynamic document that is the primary point of emphasis for the advisory relationship – not recurring discussions of investment performance and market movements.
3. PRACTICE MINDFULNESS IN YOUR DAILY FINANCIAL LIFE
A new year brings new resolutions – promises we make to ourselves to eat healthier or travel more. Inevitably, many resolutions pertain to our financial health which includes spending and saving. Like most resolutions, you need to be mindful of your goals and have a plan to reach them. When dealing with your money, the help of a trusted advisor is invaluable.
Perhaps you want to pay down a debt or save for a family vacation. Whatever the goal, being mindful of the desired result every day is the best way to make sure you stay on track. Remember: if you can’t measure it, you can’t manage it. If your goal is to pay down debt, for example, create a written plan (pay off more expensive debt first, aim to reduce debt by 20%, etc.) and track your progress throughout the year. Whether you want to reduce debt or exercise more, having a documented plan is critical to staying mindful of your goals.
Milestones such as a new year provide a great opportunity to evaluate the strategies you’re using to fulfill your financial dreams and the path you’re taking to achieve them. There are little things you can do every single day to make you a better investor, and your reward is a prosperous and secure retirement.
To find out what changes you can make to help you improve your financial health and reach your financial goals, request a call with an advisor at RAA.