This is the time of year when millions of people go through the process of setting New Year’s resolutions. Unfortunately, many resolutions will not even survive the first few weeks of 2010. Why are New Year’s resolutions very difficult to keep? One possibility is that people tend to put off dealing with the most intractable issues until the new year and, as a result, few are able to follow through for very long.
A possible solution to this annual cycle of frustration is to simply “lower the bar”. To take a non financial example, rather than resolving to run a marathon by April, it might be more realistic to set a goal of running a 5K race instead. When starting from the typical financial state of affairs for many investors, even a “low bar” is likely to result in measurable results and people are more likely to keep resolutions that are actually achievable. Let’s take a look at a few possible resolutions for investors which should be easy to achieve but make a measurable financial difference in 2010.
Lower Investment Fees and Costs
Most investors do not pay much attention to fees and costs after an investment is made. After all, mutual fund expense ratios, loads, and commissions are not much fun to think about and you can hardly brag about having the lowest cost portfolio at the next big cocktail party. Resolve to spend two hours this weekend examining the expense ratio for each and every mutual fund or money market account that you own and to compare these expenses with equivalent funds from a low cost provider such as Vanguard or Fidelity. For money market funds in particular, high expense ratios can consume almost all investment income in this environment of ultra low short term interest rates. Further resolve to revisit your expenses on a quarterly basis going forward.
Reduce Trading Frequency
Even those of us who consider ourselves to be “long term investors” often trade too frequently. This weekend, examine your brokerage statements and come up with the total number of trades you executed in 2009 along with the commission costs. Does this number seem high to you and can you recall the rationale that led you to each of the trades that were made? Could the funds spent on commissions have been used for better purposes? There is no sin in executing transactions to take advantage of compelling opportunities, but many investors trade far too excessively and with the passage of time cannot even recall why they made the trades in retrospect.
Document Investment Rationale for All Holdings
Examine each of the securities in your portfolio. Can you give an “elevator pitch” for each one of your positions? In other words, are you equipped to explain why you own the position to an individual you do not know well on a typical 30 to 60 second elevator ride? It is often easy to fall into the trap of forgetting why you purchased a security or why it is still in the portfolio. The best way to avoid this problem is to clearly document the rationale behind each and every purchase when it is made. This should be in the form of a written document that is kept in your permanent file on the investment and can be referred to at a later date. Since you have already done research on the company in question before investing (if not, that’s another resolution!) writing a brief summary of the investment thesis should not require much time at all.
Read Quarterly and Annual Reports
At a minimum, ownership of a stock requires the investor to keep up with quarterly and annual results. There is no excuse for failing to keep up with such filings since the SEC website even allows investors to set up RSS Feeds for any company required to make periodic filings. By using a RSS Feed reader like Google Reader, it is very simple to keep abreast of all filings. Perhaps the harder part for many investors is to find the time to review this information. This is also a great reason to own a reasonable number of stocks rather than 50 or 100 companies.
While investors should have a long term view of performance, it is very important to track the data accurately in order to measure your performance record over time. This can be easily accomplished with simple software such as Quicken or, for those inclined, through specialized Excel spreadsheets using financial functions. Over a three to five year period, an investor needs to achieve returns in excess of market benchmarks or superior results (with no effort) could be obtained by using a low cost index fund. However, without properly tracking results, many investors conveniently forget past mistakes and may overestimate their own abilities.
Optimize Cash Holdings
For small investors, there is really no excuse for having funds tied up in money market funds that yield next to nothing. Instead, investigate savings deposits or short term certificates of deposit. If you have access to a credit union, look into the savings rates that are offered. With treasury bills (and money market funds holding such instruments) yielding next to nothing today, investors should fully leverage FDIC insured deposits to increase returns at no incremental risk.
While it is debatable whether all of the resolutions listed above are “easy” to accomplish, at least some of them should be achievable with reasonable effort.
My Financial Resolution for 2010
My financial resolution for 2010 is to dramatically increase the number of companies I examine by reading as many annual reports and other “primary sources” as possible. I tend to spend too much time reading newspapers and other “secondary sources” with a significant portion of that time spent on macroeconomic topics. While investors need to keep up to date with the economy to the extent that it influences the prospects of companies under consideration for investment, I have devoted too much time to economic issues and not enough to company research.
Best wishes for a healthy, prosperous, and safe 2010!