Your Top 10 Financial Resolutions
Unfortunately, we can't help you get to the gym more often, and we won't try to convince you that rice cakes really do taste as good as potato chips. But if you're fiscally out of shape or your consumer consumption is too great — well, there we can help. Recently we asked you to tell us about your financial resolutions for the new year. Lots of readers responded, vowing to replace bad fiscal habits with good ones.
Over the last 10 business days of 2000 we are counting down to New Year's by publishing one resolution a day, along with tips on how to make each one stick. That way, maybe your vow will last longer than a Jan. 1 hangover.
Resolution #2:
I'll Balance My Portfolio
You know all that time you've spent trying to pick the best stocks for your portfolio? Chances are it would have been much better spent trying to figure out the best asset allocation for your portfolio. According to a 2000 study by Ibbotson Associates, as much as 90% of an investor's returns can be attributed to asset allocation (i.e., the selection of asset classes such as large cap, small cap, growth or value), not the specific stocks and bonds held.
The theory, of course, is that by balancing your risk and returns over several asset classes and investment types (stocks, bonds and cash, for example), you cushion your portfolio from dramatic downturns, while still reaping much of the rewards during upswings. (To see what we mean, enter different allocations into our Do-It-Yourself Asset Allocation applet.)
The popularity of asset allocation waxes and wanes. Over the past few years, when the market strongly favored growth stocks, many investors forgot about asset allocation. But the decline in these stocks has cured their amnesia. In an email titled "stupido, stupido, stupido," one SmartMoney.com reader swears he'll get the proper asset allocation and "stick to it!" This past year he was "going nuts" chasing hot returns. "I was 'tech' until March, 'value' March 10 to May 16, 'tech' to July 17, 'cash' until Aug. 11," he writes. Needless to say, after watching his portfolio go "down, down, down" he's ready leave his investments alone and "get a life!"
The first step in curing those bounce-around blues is to figure out your ideal asset allocation. This means understanding where all of your investments are currently allocated — including 401(k)s, IRAs, savings accounts, college funds and so on — and then figuring out how those investments should be spread out to ensure that you have the proper diversification.
That said, there's no obvious right or wrong allocation. Your ideal portfolio might look a whole lot different than say, your neighbor's or even your sister's. Sure it's dependent on things such as your age, your goals and your income. But it's also affected by your tolerance for risk, your economic outlook and your inflation forecast. Our SmartMoney One Asset Allocation System will help you understand your current allocation and assist you in determining your ideal allocation.
Once you know how you'd like to reallocate your portfolio, keep in mind that any profitable selling you do (in a nonretirement account) to accomplish that reallocation will trigger a tax liability. Our capital gains calculator will help you estimate how hard you could get hit — and also help you determine how selling some of your losers could offset that tax liability. Alternatively, you could balance your portfolio by directing new money into the areas that are underrepresented.
After you have your portfolio properly set up, the next step is easy: Relax. You can't forget about your portfolio altogether — especially if you own individual stocks. But barring any major disaster, you shouldn't tinker with your investments for at least another six months or even a year, says Norman Boone, a certified financial planner in San Francisco. As boring as it sounds, "buy and hold" is almost always the way to go. Investors who actively trade tend to underperform their more staid peers, according to a University of California-Davis study.
When it does come time to pay your portfolio a little attention, you need to look at the returns of each asset class and sector. If something has grown rapidly ahead of the market, now could be the time to lock in those gains. Likewise, new money (or some of your profit) can be redirected into underperforming sectors. Sticking to this strategy ensures that you will buy low and sell high (see Resolution #5 for more on this).
Of course, when you rebalance your portfolio, you also need to consider whether your asset allocation should change. As you get older, you should be adjusting your portfolio to a more conservative allocation. But there may be other reasons to give your portfolio a more aggressive or more conservative bent. For example, as your child approaches college age, you'll want to reduce the risk in your college fund accordingly.
Bottom line? Be sure to give both your investments and your investment philosophy an annual checkup.
Resolution #2: I'll Balance My Portfolio
Resolution #3: I'll Set Aside a Little Cash
Resolution #4: No More Promiscuous Portfolios
Resolution #5: Buy Low, Sell High
Resolution #6: I'll Max Out My 401(k)
Resolution #7: I'll Stick to a Budget. Really.
Resolution #8: No More Margin Calls
Resolution #9: I'll Pay Off My Credit Cards
Resolution #10: I'll Kick the Tech Addiction
