Anyone who has ever successfully lost weight or ended a bad habit will tell you: The battle is never really over. Even if your New Year’s resolutions were in tatters by New Year’s night, each new day represents a fresh chance to do better.
And so it goes with your finances. Rather than feeling sorry for yourself for overspending during the holidays, failing to max out your 401(k) in 2014, or sticking with a too-conservative investment mix longer than you should have, it’s never too late to look forward and enact positive change.
Below are six personal finance and investing resolutions worth considering. You needn’t put them all into place at the outset of the year, but they’re worthy goals to implement any old time.
Resolution 1: Increase your savings rate
There are several readily available tools focused on helping you find the right investments, but the heavy lifting of any financial plan starts well before investment selection. Do you have concrete financial goals that you’ve taken the time to prioritize and quantify? And does your savings rate put you on track to reach those goals, even if you don’t get too much of a helping hand from your investments?
Giving due attention to those bigger tasks will have a greater impact on the success of your plan than will small-bore decisions like whether to invest in index funds or ETFs. And focusing on your savings rate is arguably especially important right now, given that equity-market valuations aren’t especially cheap and future market returns could be on the modest side. Even if you’re able to kick up your retirement-plan contributions by a relatively small sum, that will help compensate for meager expected market returns in 2015. For example, an investor who is able to save $100 extra a month for 40 years will have an additional $90,000 in retirement, even if she earns a skimpy 3% on her money over that stretch.
Resolution 2: Watch costs like a hawk
Saving more of your income is the equivalent of logging another 10 minutes on the treadmill. It may be necessary to make your financial plan work, but it’s never going to be fun. By comparison, trimming your portfolio’s costs is one of the most painless ways to enhance your portfolio’s return potential. Although the lowest-cost investments won’t always outperform expensive ones, studies have repeatedly demonstrated that the cheapest funds generally outperform higher-cost products over long periods of time. Index funds and ETFs are the cheapest of the cheap, but many of the best active funds, such as those from Vanguard and Dodge & Cox, also feature nice low costs.
Finally, good tax management can go a long way toward enhancing your return. Focus on investing inside of any tax-sheltered wrappers that you have available, and aim to maximize tax efficiency when investing within your taxable accounts, too. Index funds and ETFs, and individual stocks are all good tax-friendly holdings.
Resolution 3: Make an investment policy statement – and stick to it
I’m a big believer in having an investment policy statement: a simple document that outlines your portfolio plan, including your investment goals, your savings rate, your approximate stock/bond/cash mix, and the parameters that you’ll use to monitor your portfolio and your holdings on an ongoing basis. By committing your investment plan to writing – including the specifics about when and why you’ll make changes – you’re less likely to react to short-term economic or market news that could, in hindsight, be a flash in the pan.
Resolution 4: Inventory everything via a master document
A master directory is another must-have document for all investors. It’s simply an inventory of your investments and other financial accounts: account type, account number, URLs, contact people, and so forth. Whereas the goal of the investment policy statement is to help you stay on track with your plan, the master directory is there primarily for your loved ones in case something should happen to you. This document obviously contains a lot of sensitive information, so once you’ve set one up, take steps to keep it safe, either by password-protecting an electronic document or keeping a physical document in a safe-deposit box or a similarly secure place. Also be sure to alert a trusted loved one of this document’s existence.
Resolution 5: Go paperless
With so many big security breaches over the past few years, it might seem as though no personal or financial information is truly safe. But you can take a handful of simple steps to reduce the chances that you’ll be a target for financial scammers. One of the key ones is to go paperless with your financial documents, paying your bills online and opting for electronic delivery of your financial statements. Assuming your computer security software is up to date and you take steps to password-protect your computer and any sensitive documents, your information is much less vulnerable in electronic format than it is as physical mail. And with fewer physical documents coming into the house, you’ll have so many fewer documents to shred!
Resolution 6: Simplify your portfolio
Diversification has been called the only free lunch in investing, but many people take it to an extreme. They hold four large-blend funds when one good one would do, or they hold a bunch of region-specific ETFs when a single sturdy foreign-stock fund would get the job done. In a similar vein, some investors manage each of their portfolio’s silos–IRAs, 401(k)s, and taxable accounts–as a well diversified portfolio unto itself. Those holdings can really add up, especially if you have a spouse. There are a few major drawbacks to portfolio sprawl, however. One is simply that more holdings entail more oversight responsibilities. In addition, an overly diversified portfolio may tend to behave a lot like a portfolio consisting of broadly diversified index funds, but with higher costs.
Paul Staib | Certified Financial Planner (CFP®), MBA
Paul Staib, Certified Financial Planner (CFP®), is an independent Fee-Only financial planner. Staib Financial Planning, LLC provides comprehensive financial planning, retirement planning, and investment management services to help clients in all financial situations achieve their personal financial goals. Staib Financial Planning, LLC serves clients as a fiduciary and never earns a commission of any kind. Our offices are located in the south Denver metro area, enabling us to conveniently serve clients in Highlands Ranch, Littleton, Lone Tree, Aurora, Parker, Denver Tech Center, Centennial, Castle Pines and surrounding communities.
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