Here are Jonathan’s financial resolutions for 2013. Please feel free to share these with family members and friends.
1. Check your investment diversification. 2012 was a pretty good year for stocks, so you may find that the percentage of your investments held in stocks and stock mutual funds is higher than it should be. So this is a good time to make sure your money continues to be well diversified. Your goal should be to maintain a well-balanced portfolio that can withstand all kinds of market conditions. Resist the temptation to plow more money into a market sector that has risen mightily or selling investments simply because they are going through a rough patch. Slow and steady wins the race.
2. Earn a guaranteed high return on your money. If you carry high-interest credit card balances, you can earn a sure rate of 19% or more on your money. Whatever debt you have – credit cards, car loans, or a mortgage – paying down principal has a return equal to the interest on the loan. With rock bottom interest rates on money you have sitting on the sidelines, reducing your debt is a very smart thing to do with that money. While you’re paring down your debt, imagine how a debt free life will improve your financial future.
3. Protect your family from life’s uncertainties. Mistakes in your financial planning can put a big dent in your financial progress. For example, single gaps in insurance coverage like too little life insurance or lack of an umbrella liability policy could jeopardize all that you have done so far to create a secure financial future for you and your family. Also, make sure your will and other estate planning documents are up-to-date.
4. Live beneath your means. If you don’t get into the habit of spending less than you earn, you can’t build the resources necessary to become financially secure. If, as many are predicting, future investment returns are going to be lower than in the past, saving regularly and regularly increasing the amount you save will become even more important. This isn’t rocket science, but the truth is that most of us should resolve to save more by consuming less.
5. Make the most of your home. No homeowner enjoys a stagnant housing market, but your home will still be an excellent long-term investment - even better if you can pay off the mortgage before you retire. In fact, if you can be mortgage free by the time you retire, it’s hard not to have a financially comfortable retirement. If you’re a renter, this is still a great time to buy a home due to a perfect storm of low mortgage rates and comparatively low home prices.
6. Help your kids become financially savvy. The more you can help your children or other younger generation family members learn about the value of money, the better their chances of becoming financially responsible adults. The best way to show your children how to handle money is by setting a good example in your own financial life. Don’t keep family finances a secret. A survey of top investment managers reveals that their interest in investing was kindled by discussions with their parents about money at a young age.
7. Consider a Roth IRA conversion. Roth IRA conversions, where you transfer money from a traditional IRA to a Roth IRA, make sense for a lot of people if you can afford to pay the taxes due on the conversion. The advantage of a Roth is that future withdrawals will not be subject to federal income taxes. Moreover, if you can get by without having to tap into all of your Roth IRA money, your heirs will be able to enjoy a lifetime, tax free income from their inherited Roth. You have until the end of the year to make a conversion for 2013, but I want to get you thinking about it now.
8. Balance your investments. It’s easy to make costly mistakes in your investments by changing the way you invest on the basis of a whim or someone else’s opinion. Successful investors build a solid foundation of high quality investments including stocks and bonds. By devising a sensible way to diversify your money and then sticking with it, you will avoid the two greatest pitfalls to lifelong investment success: Greed, which causes investors to pour too much money into stocks after they’ve risen (this is what worries me now) and fear, which impels investors to flee the market after stocks have fallen.
9. Invest in your career. Your career has been and always will be your best investment, so devise a plan that will help you be the best you can be at your job through good work habits, a positive attitude, and continuing education. If you are contemplating a career change, do you possess the requisite skills that will assure success and will job opportunities be plentiful in your new career?
10. Simplify your financial life. I like to stress the importance of seeking safety, simplicity, and predictability in your financial life. There are many things you can do to simplify your financial life this year, starting with cutting down on the number of bank and investment accounts you have and opting to receive your bank and brokerage statements online rather than on paper. But there’s a lot more to simplifying your financial life, like opting for straightforward investments rather than the exotic investments that end up being a debacle for many investors. Exchange-traded funds, index funds, and target funds offer simplicity, as do straightforward, old-fashioned insurance policies. So as you go about your financial life in 2013, look for simpler solutions.
11. Help younger generation family members prepare for retirement. One of the best ways to teach children, grandchildren, nieces, and nephews about the importance of saving for retirement and investing is to help them fund their retirement plans. Anyone who has job income, even from summer or part time jobs, can contribute to an IRA, even if they are minors. Once a younger generation family member gets a “real job,” you might be able to afford to help him or her contribute to a retirement savings plan at work. I know this is a good investment for the youngster. But it may also be a good investment for you insofar as the sooner you can teach younger generation family members about financial responsibility, the better chance of your not having to help them out later on.
Nevertheless, despite your good efforts, you may need to provide financial help to get an adult child in need. Whether you are already helping or may want to in the future, keep these two caveats in mind. First, can you easily afford the outlay? I have received a number of disturbing emails from parents who themselves are living on the edge financially, but still feel compelled to help out their kids. While this may be a natural inclination, you don’t want to impair you own financial future. As callous as it may sound, you may simply have to say that you can’t afford to help. Second, if you are providing financial assistance, don’t let temporary assistance turn into an annuity for the family member. You have to draw the line somewhere, or otherwise you will end up enabling the child who may come to view the periodic assistance as an entitlement. If that’s what you want to do and can easily afford to send money indefinitely, so be it, but be wary of how this might adversely affect your child’s initiative and self-esteem.
12. Don’t rely on the opinions of the pundits. There will always be people who think they can predict the future of the investment markets, and they are particularly eager to offer their opinions at the beginning of the year. Those who do either have an agenda – they want to sell you something or promote their firm or, more likely, they are delusional and should therefore be encouraged to seek mental health counseling. It’s impossible to predict with complete accuracy how the investment markets will fare, particularly over the near future. Whenever the markets are flourishing or declining, we tend to put more credence in the opinions of the so-called experts. But if it’s so easy to predict the markets, why were so many of these ersatz pundits so pessimistic about stock market prospects last summer?
One of the most successful investors I have ever known – he had a sprawling Park Avenue apartment replete with a butler – used to have an assistant tally the positive and negative opinions of the experts on market prospects. Whenever a strong majority was optimistic he would sell stocks. The more optimistic they became, the more he would sell. He did the opposite if the prevailing opinion was pessimistic. I guess he did rely on the opinions of the pundits, but only to invest the opposite of what they forecast.
13. Always keep your eyes on the retirement prize. Everything you do during your working years, from saving regularly to acquiring comprehensive insurance coverage, will affect how you will fare when you retire. The same applies to retirees. Despite all of the negative reports about our supposedly dire financial straits, a better financial future and a great retirement are well within your grasp. That’s what I will always strive to do in my weekly Ponderings for the rest of the year.