New Year’s resolutions are an annual ritual for many, and health-related resolutions are among the most common. In the spirit of the season, investors should consider making (and sticking to) New Year’s investment resolutions for 2023 to lead a healthier investing life.
The following resolutions can reduce stress and improve investment performance:
“Activity bias” is a common pattern of behavior among investors who closely monitor daily (or minute-by-minute) activity in the markets. Many investors would benefit from finding a healthier balance between being well informed and being overly stimulated by market news.
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Investors who struggle to find that balance often trade more frequently than is advisable, leading to underperformance and tax consequences.
Consuming less business and political news can be a healthy solution for those who find themselves bingeing on the latest tweets, shows and articles.
2. Spend less time in “Echo Chambers”.
Confirmation bias is the tendency to look for evidence that supports pre-existing beliefs and to interpret information in a way that supports the existing position. Echo chamber (opens in new tab) that comes from avoiding opposing viewpoints can lead to costly investment mistakes.
Seeking opposing viewpoints is a necessary step in testing an investment viewpoint and an important (and perhaps uncomfortable) resolution for 2023.
3. Look at your portfolio objectively.
The new year is a logical time to evaluate your current investment assets. Some recent winners may have benefited from a favorable market environment and may not be able to sustain their success. If recent success is not sustainable, it may be time to look for opportunities to upgrade holdings to an investment with superior prospects.
The same analysis should be applied to less successful positions. Assessing whether lost positions are likely to recover is a critical aspect of portfolio management. Often the recent laggards are tomorrow’s leaders. But some investments that seem cheap today can be much cheaper!
In a rapidly changing environment, it is important to be cautious about winning and loss of investment holdings.
4. Ask the right question(s).
Investment discussions in January are dominated by forecasts for the coming year. The most common question is, “What do you expect the market to do this year?”
Although the natural impulse is to focus on a one-year perspective, for most investors a focus on a relatively short-term time horizon is counterproductive. Investors should start the year with a budget and investment allocation that takes into account known cash needs and an emergency reserve for unexpected cash needs.
Beyond these short-term cash needs, the rest of the portfolio should be invested in line with long-term financial and personal goals. The right questions to ask integrate investments with financial planning goals, focusing on long-term goals.
Realistically, once cash needs are met, most investors have a time horizon of years, if not decades.
An unreliable “crystal ball” for investment performance over one-year periods becomes more reliable over longer periods, making investment planning a less stressful exercise.
5. Read the book.
The final suggested resolution for the beginning of the year is: Read a book! There are several books that provide good advice on how to be a more self-aware and effective investor.
Daniel Kahneman (opens in new tab) he won the Nobel Prize in 2002 for findings that challenged the assumptions about human rationality that prevail in modern economic theory. Kahneman’s Thinking, fast and slow summarizes decades of research and explains the thought patterns that influence decision making.
Investor and adjunct professor at Columbia Business School Michael Mauboussin (opens in new tab) he has done significant work on behavioral finance and on evaluating investment success and failure. Mauboussin’s The Success Equation: Skill and Luck in Business, Sports, and Investing provides insight into the roles that skill and luck can play in investment success and how to better differentiate between the two.
Making New Year’s investment resolutions can increase the likelihood of long-term investment success. Staying on track with resolutions is easier said than done.
You’re more likely to stay on track for people who hold themselves accountable for their resolutions, so it can be helpful to put resolutions in writing and keep them in a visible place as a constant reminder.
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This article was written by and represents the views of our advisor, not Kiplinger’s editorial team. You can check the advisor’s record with the SEC (opens in new tab) or with FINRA (opens in new tab).
