2014 resolutions: investment mantras that could yield a happy new year
There is no better time to review your portfolio of investments and make sure they are working for you
The New York Stock Exchange can be fun for traders with the requisite temperament and discipline, but most people shouldn’t trade at all as only a tiny minority ever beat the market. photograph: bloomberg
A new year means new resolutions. Following them is another matter, of course, but it’s worth making the effort with the eight suggestions below – your wallet will thank you.
The magic of compound interest means that, generally, the best time to start investing is now. Take a 25-year-old who invests €3,000 yearly into an account earning 8 per cent annually. Aged 35, he stops investing, but leaves his lump sum intact. Aged 65, his account will be worth over €537,000.
Alternatively, take a 35-year-old who also invests €3,000 into an account yielding 8 per cent, and continues to do so annually until he is 65. By then, his account will be worth €397,000. Despite investing three times as much money, he is €140,000 poorer.
Think about asset allocation
Asset allocation – your mix of stocks, bonds, commodities, cash, etc – is much more important than stock selection. Some people stick to a standard 60:40 or 70:30 mix between stocks and bonds. A more thoughtful approach is to take more risk in your youth and less as you near retirement.
Some suggest you subtract your age from 100 (or perhaps 110 or 120), the answer being the per centage of your portfolio that should be in stocks.
US investor Larry Swedroe suggests you have all of your money in stocks if you won’t need your money for at least 20 years. Reduce it to 90 per cent when retirement is 15-19 years away; 80 per cent from 11 to 14 years; 70 per cent when a decade years away; and then reduce by 10 per cent annually, ensuring all of your money is in bonds within three years of retirement, to protect against sudden market falls.
No one approach is “right” for everyone.
If you can’t handle market volatility, says US index investor Rick Ferri, accept a low equity weighting and maintain this allocation rather than running the risk of panic selling in a bear market. “This isn’t a sign of weakness; it’s a sign of intelligent decision making,” he says.
Ordinary investors tend to buy high and sell low – more money went into equity funds in early 2000, the peak of the internet bubble, than ever before.
More money than ever before was withdrawn in late 2008, near the bottom of the bear market induced by the global banking crisis.
A better approach is to rebalance annually. For example, US equities have trounced most major equity markets in recent years. Not only do they now look expensive, their gains mean they now occupy a greater percentage of people’s portfolios than previously.