It is a new year and there is a lot to look forward to. If you live in the northeast, like I do, then the weather is not one of them. As I write this my weather app says it’s 13 degrees outside! But what does the start of the New Year give us? Let’s run through some of the important aspects that affect your financial life.
There are a lot of articles and blogs out there that provide great advice on how to reduce your unnecessary expenditures or to create a budget (I like Club Thrifty). Budgets are important but the reality is that they are tough to follow through on. If given the choice many of us would rather shovel out our cars then go over what we spent. Why should we care about what we spend on now?
The New Year allows us to think about what we want, rank them and plan accordingly. It is easy to satisfy short term wants then the long term needs. Why should we delay satisfaction? A study (called the Stanford Marshmallow Experiments) done in the 60s & 70s by Walter Mischel produced interesting results of delayed gratification. Children ages 3-5 were offered one small reward immediately or 2 rewards if they waited. The children who decided to wait typically had better outcomes in life then the children who took the small reward immediately. There are some disagreements about this study in the scientific community but we can at least take away that there are better outcomes then giving into our short term desires.
We all want to retire at some point but for many of us it is too far away to think about. Retiring cannot happen over night but without proper planning you can have 2 very different outcomes. Properly saving now can improve your results of having a retirement you want and desire. So, as we begin the new year, think ahead.
2013 was a great year for many people who held equities in their portfolios. What can we expect for 2014? Honestly, no one knows. No one has a crystal ball to predict the future but let’s utilize what we do know to give us our best chance. Fees matter. Diversification matters. Emotion matters. Start off by new year by controlling what matters.
You want to make sure that you invest in low cost funds. Many of the mutual funds that have high fees perform the same or worse than low cost index funds. Why? Because mutual fund managers cannot consistently beat their benchmarks. So why pay higher fees?
A diversified portfolio means investing in different asset classes like stocks or bonds, large companies or small companies, foreign or domestic assets. Asset classes are what ultimately drive the returns an investor will achieve over time. Since, we do not know which asset classes will perform well over the year, we should have a percentage dedicated to a few of them. Purchasing a handful of individual stocks is not diversification and can create more risk then you want.
Emotional investing. Many of us do it but most of us don’t want to admit it. We work hard for our money and do a good job of saving. When the markets head downward we feel like moving everything to cash. When the markets start to climb we are ready to jump back in. The problem with this is that you are essentially selling low and buying high. Exactly what you do not want to do. How do you fight your emotions? Create an investment policy statement that will define what asset classes you will own, how much should be allocated to it and what the range in percentages of each class should be. At the end of the year if your portfolio is overweight, rebalance into the asset classes that are underweight.
Risk is usually the last topic we think about and one that we would rather forget about. Risk are things that can derail your plan. Proper planning in this area is necessary because bad things can happen in life. Start the New Year off by thinking about the risks to your plan and how you can protect them.
Insurance can help alleviate these risks. A death, disability or even the care of a long term facility can greatly affect your goals. Check with your employer to see what they offer for benefits. Often times insurance with your employer will be far cheaper than if you got it on your own. One word of caution though is that if you leave or get laid off those benefits are gone and the older you get the more expensive the benefits are.
You should also consider proper estate planning. Again, it’s a grim topic but think about your family when you’re gone. Without a proper plan in place can leave a great burden on those you truly care about. A proper estate plan includes making sure your accounts have updated beneficiary information on them as well as the legal stuff (wills, trusts, etc.). This year start to think about the risks in your plan.
As with the New Year comes new opportunity for success. Good Luck!