The Holidays should be a time of joy, reflection, and gratitude. At the very least, we made it through another year. But, for almost all of us, there are always things we wish were different, changes we’d like to make, errors we’d like to correct. This is the time of year when we make promises to ourselves.
Making New Year’s resolutions is a popular American tradition. According to Motley Fool, 66% of Americans planned to make a financial New Year’s resolution in 2023, yet Forbes tells us that approximately 80% of New Year’s resolutions fail. If you are among the group that plans to make one or more resolutions for 2024, and you’d like to see them succeed, we’d like to offer you some practical advice.
If you’re reading this near its publication in November, you have done a critically important thing: you’ve started your resolution process early. You have time to give the subject careful consideration and to think through why some resolutions succeed while most fail.
The great majority of New Year’s resolutions fail because they are tactical in nature. They are not specific enough, they don’t require structural change, their time horizon is too vague, and there is no link to the things that truly matter. Will your life really change in any meaningful way if you lose 10 pounds? Will it matter if you gain them back in Spring?
In this blog, we would like to consider the most popular New Year’s financial resolutions and offer an opinion as to their value. We’ll take these resolutions from worst, which we’ll give Ds and Fs, to meh, which will earn Cs and B-s, to worthy and even vital. Those we’ll give B+s and As. Note: we have heard investors make every one of these resolutions.
Your Energy Would Be Better Spent On Something Else
Resolution: I will add to my mutual fund portfolio
It’s hard to imagine a less worthwhile financial resolution. There is literally nothing you can do with mutual funds that you cannot do better with another investing vehicle. Mutual funds have a miserable track record vis-a-vis indexes. According to CNBC, in 2021, “about 85% of US large-cap stock funds underperformed the S&P 500…the (underperformance) share was 99% for large-cap growth funds relative to their benchmark”.
In addition, mutual funds are a disaster from a tax efficiency standpoint. There’s nothing you can do to hold the fund’s assets in the most appropriate type of account, no way to harvest losses on holdings, and zero control over turnover.
Finally, mutual funds are opaque. You cannot know what your fund’s holdings are, but you can guess that the fund is designed to maximize the profits of the fund company, which means it will lack conviction.
A far better resolution would be to replace all your mutual funds with ETFs or separately managed accounts.
Resolution: I will commit more money to the stock market when it hits a new high.
Buying high is half of the buy high/sell low disaster that plagues so many investors. The right time to commit more money to stocks is as soon as possible—if you’re not already in retirement or already up to the limit of your financial plan’s mandate. As a strategy, buying on the highs is almost as bad as selling when the market hits new lows. If you simply can’t bear the idea of making a lump-sum investment in the market, we suggest dollar cost averaging: put 10% of your committed funds into the market every week or two until it’s all in. Then go about your life and let your money compound through the ups and downs that are just a fact of market life.
Resolution: I will spend an hour every day trading stocks.
We’re not suggesting that profitable day trading is impossible—just that it’s virtually so. A very small percentage of day traders ever have a profitable experience, and a depressingly large number lose all or nearly all of the money they put at risk. The reality is that that extra hour spent at your job would likely produce far more money for you, and the extra hours you spend with your spouse or children will enrich your life experience in ways that can’t be measured in dollars.
Resolution: I will take out a home equity loan to put money in the market because I’m sure I know who will win the next election.
First, you don’t know who will win the election next November. If you did, you’d be far better off placing a wager on it.
Go to VegasInsider, or InsidersBettingDigest, or OddsShark, or some similar website and go crazy. The reason there are odds is that nothing is certain. Nate Silver’s FiveThirtyEight, which many considered the gold standard of predictive polling in 2016, gave Hillary Clinton a 71.4% chance of winning on November 8th of that cycle. Jimmy Carter only lost his edge to Ronald Reagan in 1980 on July 1st of that year—and then went on to a nearly complete wipeout in the Electoral College 489 – 49.
Not A Total Waste Of Time, But Don’t Expect Miracles
Resolution: I will check my credit score more often.
This does get a passing score; it’s not an awful idea. But would it not make more sense to set up autopay on your mortgage, car payment, and student loans? Or better yet, resolve to pay off your credit cards? The goals are good ones: get to a point where you have money to save every month and reduce your borrowing costs in the future.
You should also note that your retirement and investment accounts can compound entirely independently of your credit score.
Resolution: I will create and stick to a monthly budget.
We’ll stipulate that your cost for a homebrewed caffe latte is going to be a tiny fraction of what Starbucks or Dunkin’ will charge. Likewise for bringing your lunch to work and booking your car rental and flight as a bundle. There are all kinds of ways you can economize. But in the end, you won’t save your way to prosperity.
This resolution has more merit if you commit to investing your monthly excess cash. After your emergency fund is set up, divert as much free cash as you can into your investment account.
Resolution: I will move big purchases, like a new car or grand vacation, forward because inflation will only make these things more expensive than I can afford.
First, do you really know what inflation will do? Do you know if it will specifically affect the things you want to buy? Are cars more expensive due to demand or due to supply inputs? Isn’t it possible that some cars will actually become cheaper? Second, have you considered that persistently high inflation could lead to a recession and, in turn, a deflationary cycle?
Inflation is a risk, to be sure, but it is that almost limitless category of things that simply can’t be reliably predicted or controlled, at least by you. Inflation can have a massive impact on the economy—just ask Jimmy Carter. If you’re worried about inflation, perhaps it’s wiser to delay those big ticket items for a while and husband your resources.
Resolutions That Pay Off
Resolution: I will determine exactly what I’m spending on advice and financial products.
You may think you know what your actual costs are, but if you do, you’re in a small minority of people who do. If you own mutual funds, it’s extraordinarily difficult to determine what your costs are because your costs are embedded in the management of the fund. Even your fund manager is unlikely to know what their actual costs are. Yes, you can know the expense ratio, but often, that is smaller than half of the total costs.
The good news is that discovering your costs is actually pretty easy. You can visit websites that are set up specifically to disclose the real costs of financial products. In the category of advice, simply ask your various advisors to give you a comprehensive itemization of all costs in writing. They may refer you to something called a Form ADV, but that won’t disclose your costs. It will only disclose what the range of costs may be. Ask what your specific costs are, how they’re calculated, and when and how they are collected.
Resolution: I will get a comprehensive review of my insurance coverages.
You may be thinking, “I’ve got plenty of life insurance; this one doesn’t apply to me.” Life insurance is a good thing, and if the worst happens, your loved ones will be grateful for your thoughtfulness. But life insurance is a complex product offered by a great many companies that are constantly competing to create better products. It’s possible that you have an “old” product that delivers less value than a new one would. It’s even possible you have too much life insurance. Either way, a review can’t hurt.
While life insurance protects you from dying too soon, what about living too long? Gone are the days when so few folks made it to 100 that Willard Scott could give them a shout-out. Will you have guaranteed income for as long as you and/or your spouse will live? Will that stream of income grow with inflation? An annuity may make sense for you, or there may be other, more attractive options. Have a review of this topic, and understand your options.
What about long-term health care? Are you good to go for a long and healthy life? And what if a dread disease, like Alzheimer’s or cognitive decline, strikes one of you? The costs of assisted living and memory care can be ruinous. Resolve to understand your choices in this area; it may be the single most important resolution you can make.
Resolution: I will get a clear-eyed, fact-based understanding of my downside risks.
This resolution falls under the broad category of transparency. Transparency means you have real clarity regarding the rationale behind all your financial decisions, what the decision variables were, and the incentive structure of your advisors.
If you ask what your risk level is, and you hear something like “moderately aggressive” or “conservative,” understand that you have just received information that is almost entirely without value.
There are many decades of hard data about how asset classes work. What their expected return, volatility, and historical down periods have been. Because of that, you can have a reasonable estimate of what your total downside maximum loss is, expressed as a percentage. Understand that that “loss” is probably temporary; the history of the U.S. stock markets shows a long-term upward trend despite all the bulls and bears. But that may not mean much to you when all the news is bad, and everyone around you is losing their heads.
Down markets have destroyed more financial security than recessions, inflationary periods, or wars. The urge to sell low can be overwhelming. The wise investor sets their risk levels, trusts their strategy, and rides out the ups and downs.
Making and sticking to financial resolutions can be a very positive thing. But if you’re going to take the time and trouble to make changes, why not make changes that really matter?