How can you make better investment decisions in 2018? Decisions that increase your odds of success and get you closer to reaching your goals?
Here are five investment resolutions that will put you on the right track.
Resolution No. 1: Increase Contributions
Nothing you do will have a bigger impact on your bottom line than increasing your contributions. And honestly, it’s not even close.
It’s a lot sexier to debate which mutual funds to invest in, which retirement account is best, or whether now is a good time to get in or out of the stock market. But none of those things will have anywhere near the impact as simply saving more money.
Saving more money now is the best way to ensure that you’ll have more money later on. Which, it turns out, is the entire point of investing.
So, what’s the best way to increase your contributions for 2018?
First, check to see whether you’re taking full advantage of your employer match. If not, increasing your contribution there will often have double the impact of contributing elsewhere because of those extra employer contributions.
Second, if you have the room in your budget, see if you can max out your various retirement accounts. The maximum allowed contributions for 2017 were $18,000 for a 401(k), $5,500 for an IRA, and $3,400-$6,750 for a health savings accounts. (Yes, health savings accounts are fantastic retirement accounts). These limits are even higher if you’re age 50 or older.
Third, if you can’t make a big increase, commit to making small changes over time. Increase your contributions by 1% now and set a calendar reminder to increase them by another 1% every six to 12 months going forward. If you do that consistently, you’ll be ahead of the game in no time.
Resolution No. 2: Cut Costs
Here’s another unsexy topic that has a big impact on your bottom line. Research has shown that cost is actually the single best predictor of future investment returns. The less an investment costs, the more likely it is to outperform.
It may sound a little counterintuitive at first, given that we’re used to paying more for higher quality products. But think about it this way: Every 1% LESS you pay in fees is 1% MORE you earn in returns — every single year for the rest of your investment life.
That, the fact that higher-cost investments typically underperform anyways, is why reducing your costs is so effective.
So, now is a great time to find out what you’re paying for your investments and slash costs wherever possible. Here’s a guide that will help you do just that: Eight Investment Fees to Watch Out For.
Resolution No. 3: Rebalance
A good investment strategy is aggressive enough to earn reasonable long-term returns, and conservative enough to not risk more than you can either afford to lose or feel comfortable losing.
That means finding a balance between investing in high-risk, high-return investments like the stock market and lower-risk, lower-return investments like bonds. The specific balance you want to strike is called your asset allocation, and you can learn more about how to find that balance here.
The problem is that even if you set your investments up to perfectly match your desired asset allocation, they will slowly drift out of balance over time.
Let’s say that you want 70% of your investments in stocks and 30% in bonds, so you set it up just like that. If, over the course of the year, stocks do well and bonds do not, you may find that you’re now 80% invested in stocks and 20% in bonds, simply because stocks have increased in value and bonds have decreased.
And that’s where rebalancing comes in.
Rebalancing is the process of bringing your investments back in line with your desired asset allocation. You can do it by selling some of the investment that’s increased in value and using that money to buy more of the investment that’s decreased in value. Or you can do it by contributing more money and putting it toward the investment that has decreased in value.
Either way, rebalancing brings your investment portfolio back in line with your desired balance between risk and return, and now is a great time to do it.
Resolution No. 4: Simplify
How complicated is your investment portfolio? How many different mutual funds do you own? How many different accounts do you have? How many different companies are they with?
Investing doesn’t have to be complicated. In fact, simplicity often lead to better results and complication often leads to confusion, mistakes, and lower returns.
Consider simplifying your investments in any or all of the following ways:
- Using an all-in-one mutual fund, like a target-date fund.
- Automating your contributions.
- Rolling over old 401(k)s into your current 401(k) or an IRA.
- Moving all of your investment accounts to a single company (be careful about taxes, though, if you’re moving a brokerage account).
My guess is that the simpler you make things, the more success you’ll have.
Resolution No. 5: Relax
Investing can be stressful. There are lots of ups and downs that can make the future feel very uncertain. And there are a lot of decisions to make, which can lead to anxiety over whether you’re making the right ones.
Here’s the thing:
- As long as you’re saving (see Resolution No. 1), you’re most of the way there.
- If you’re saving into tax-advantaged accounts – whether they’re Roth, traditional, or whatever – you’re almost all of the way there.
- If you’ve also minimized costs and have a reasonable balance between stocks and bonds, you’ve done all the important things and you’re now ahead almost every other investor out there.
Don’t worry about finding the “perfect” investment strategy. It doesn’t exist. Worry about doing the important things well enough and get on with your day.
Oh, and yes, the stock market will decline from time to time. Sometimes pretty significantly.
When it does, it’s your job to take a deep breath, remind yourself that investing is a long-term exercise, and stick to your plan.
That’s the difference between success and failure.
Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.