New Year’s Resolution: Invest Better
Failed Resolutions are Symptomatic of Disease
Before the dawn of each New Year, millions of people set goals or benchmarks for themselves with the purpose of self-improvement. The word “resolution” means to strongly determine whether to do or not to do something.
Yet we as a flawed species have a tendency to bark fiercely and never actually bite–we feel proud of making the resolution without considering the level of self-control and discipline following through would require.
Most people resolve to “work out more”, which is often vague and flexible enough to accomplish with little increased effort. Most candidates also typically abandon their resolutions by the first of February.
As a culture we have discarded all integrity and discipline, and it’s showing in our economy, our debt level, and our family life. We say “I do” at the alter, but fail to verbalize the “for now” that lingers in our minds. But this is a broader issue to be addressed at a different time–let’s return to title-content correlation.
A Resolution of Legacy
What if this year you chose to manage your finances better? What if you, by revisiting your portfolio, setting management standards and committing to a strategy, changed the way you invest and save money? Setting a resolution toward financial success may sound cliche and perhaps shallow. Yet ordered finance is one of the most important things in life–it can drastically change and even save lives.
While money is eternally far from everything, it also holds extreme importance in today’s world, and you have the opportunity to bless your family and others as well with fiscal responsibility. Below are three steps toward changing your financial future through simple and minuscule disciplines:
1. Reassess Wants and Needs
Frugality sounds lame. Spending appears awesome. But compound interest is downright sexy.
For the next fifty years, if you saved $1,000 every year on some small behavioral change–like starting to use coupons, quitting smoking or cutting out impulse purchases–and continually invested that money, achieving a performance of 10% over 50 years, you will have made $1,280,299.00
Wait, that’s not real, is it? IT IS!!! It is absolutely possible for you. $2,000 a year gets you double. So you turn $50,000 into $1,280,299.00 or $100,000 into $2,560,598.00–just by investing $1,000 a year.
People think you have to be rich to make millions through investing, but you just need to be disciplined.
Do yourself, your family and others a favor. Evaluate what you need, what you want, and what you can save this year. It could be a decision worth millions.
2. Solidify Financial Goals
People ought to set clear and accountable goals for themselves. Getting out of debt is possible. Funding your children’s education is possible. It’s all possible with the proper budgeting and saving. In order to assess what you need to get to the finish line, you need to know where the finish line is. What kind of retirement do you want? How many years will you even work? Take some time to think about these goals, write them down, and put the damn piece of paper on your bathroom mirror so that every morning you will be reminded of them. Otherwise you will forget them, and you will fail.
One of these goals should be creating a budget for next year. Review how much you made and spent this year, and measure how much you can and should save (and invest) next year. Whatever your calculated expenses are, add 10% just to avoid being overly optimistic. Then stick with these numbers by setting weekly and monthly spending limits. Use direct deposit and debit card limits to enforce disciplined behavior.
3. Rebalance Your Portfolio
What does your portfolio allocation look like? Popular recommendation for equity vs. bonds proportion is for each individual to subtract their age from 100, and conder that number the percentage of wealth he or she should invest in stocks. I am 21, and therefore my allocation would be 79% and 21% bonds or some other form of fixed income. However, a growing number of professionals are advising people in their twenties to invest 200% in stocks, which means using a margin of 2.1 to invest (borrowing money).While at first glance this may seem unwise, these young adults have decades of work ahead of them, and often much less to lose than their elders. Sector, market capitalization, and beta diversification can prove an alternative to uber-conservative security allocation.
Older people are hesitant to pour majority of their savings into stocks, because they’re worried about another recession similar to ’08. Yet you can see in the chart below, that most of the downside was recovered within three years.
A general rule in the industry, because of such a worst-case scenario evaluation, is for individuals to only invest money they will not need within three years. I would personally advise having 5% of your wealth set aside in fixed income or cash, with 95% invested in equities after age 30. Before then, at least 100% equities, since historically the smoothed out stock market track record of roughly 10% (which is what we care about–not short-term performance) proves unbeatable.
Bottom line? Reevaluate your risk tolerance and invest accordingly. Then stop worrying about it and don’t second guess yourself. Simple as that!
Make this year the year you position your finances toward incredible success. Don’t live wildly outside of your means or needs, focus on where your money’s going and where it should be going, and rebalance your portfolio in a way that will maximize returns. In the coming year of 2014, however, let me challenge you to consider where you are in life, what you’ve done with your spent years, and what good you can do for others in the years to come. Happy New Year!