Resolutions For Investing

The start of a new year lends itself to making personal and professional commitments for the future. Here are a few resolutions that might be helpful anyone's plans for financial success:

Ignore the financial media. Like others in their field, the financial media want to tell the extraordinary story, something that will increase their audience. Fortunately for them, there are many ‘experts’ claiming an extraordinary ability to predict the future direction of markets. Unfortunately for investors, such stories mask the truth – no one can accurately predict the future. Identifying and ignoring this hype allows investors to make investment decisions based on personal needs, instead of the biased opinions of strangers.

Determine your risk tolerance. One of the cornerstone concepts of investing is that risk and return are related. Investors who seek higher returns can only do so by accepting more risk, but more risk also increases the possibility of a negative outcome. It’s crucial for investors to decide how much volatility they are willing to accept over both short and long-term periods. Only then can one construct an asset allocation that is right for their risk tolerance. This is the cornerstone of investing, yet it is often overlooked.

Do not attempt to time the market. In 2010, the broad stock market hit its low point around July 1. If you would have left the market at that time, and followed the conventional wisdom of a double-dip recession, you would have missed the subsequent broad stock market rally of 20%+ over the last half of the year! Plus, now you would have to decide the ‘right’ time to reinvest. While it’s human nature to follow the latest investment fad, this is yet another example of the outcome an investor can expect when trying to time the market.

Focus on what you can control. Worry is a useless emotion, especially in financial markets, where movements are largely based on unpredictable and uncontrollable events. Investors who focus on that uncertainty are sure to have anxiety over what the future holds. That unease can be avoided by concentrating on financial planning items that can be controlled, such as discretionary spending and desired risk. Investors cannot control the market, but they can control making emotional decisions related to it.

Just as an exercise partner will help someone keep a resolution for a healthier future, I tell people that I will be their investment partner to keep these resolutions for their financial future. Here’s to good health and good wealth in 2011!