With 2010 now history, many investors are asking themselves where they went wrong? For sure, many veered off track. But instead of ruminating, fess up to the mistakes and focus on recovery — how best to move forward financially in 2011. hen take action.
Don’t think you were the only one tripping over yourself. Here’s a look at typical missteps and how to get your groove back next year.
Keep your emotions in check
There was plenty to get spooked about — the flash crash and the Euro crisis, for example. But cooler heads must prevail. “To put it simply, emotion has driven the actions of the average investor in 2010,” says Kimberly Foss, president of Empyrion Wealth Management. While no one wants their investment portfolio to go down in value, investors have to have a strong stomach. Markets fluctuate daily.
“Many investors rushed backed to the sidelines in mid year when the market significantly corrected due to fears over European debt problems and a weak U.S. recovery. Both issues are still present, although the news is less dire. Individuals who got out in July missed a rapid market recovery,” says Nancy Skeans, partner, personal financial services with Schneider Downs Wealth Management Advisors.
Fight your fear with facts. “Go back to your financial road map – your investment plan. It was designed in rational times with your long-term goals in mind. Check your financial GPS and get back on course with your plan,” says Foss.
Developing a plan to spread investments out among different assets classes is a secret weapon – a way to help protect your portfolio from market ups and downs in the long run, adds Paul Brahim, managing director at BPU Investment Management.
You don’t want to obsess about money daily, but don’t make the mistake of closing your eyes, clicking your heels and saying, “there’s no place like home.” Wishful thinking won’t do much for your retirement. Do a real financial check-up. Know exactly how much money you owe, to whom, what the interest rate and minimum payments are, and when they are due each month, advises Deana Arnett, a certified financial planner with Financial Planning Services.
Adjust your budget to meet current income. Eliminate expenses that are not essential or that can be downsized, says Brian O’Sullivan, a certified financial planner with the Commonwealth Financial Group.
In 2011, it’s about money dates. On a monthly basis, review your progress, and don’t let your financial advisor be a stranger, have a sit down twice next year.
Keep your eye on the prize. “You don’t just join a gym and then never go to work out – you get little benefit. It’s important to stick to rebalancing, contribution and diversification routines, or choose a service that does these important things automatically for you,” says Jon Stein, CEO of Betterment.com, an online investing service.
Lead, don’t follow
Be you, do you. “If you hear about it on TV, radio or the Internet, the money has already been made. Following the herd may make you feel like you are doing the right thing, when in reality it may be hurting your overall wealth strategy,” says Foss.
Forget chasing winners. Monkey see, monkey do, isn’t ideal on the playground or in the investment arena. “Everyone wants to buy gold now that it is at an all-time high, want to buy bonds at the heights, and don’t want to buy stocks while they are down,” says Michael Cocco, a certified financial planner with AXA Advisors. Instead, he says, “Look at your time horizon and risk tolerance, not just what has done the best this year.”
Investments are not one size fits all. “Your needs and financial situation are more than likely very different from your neighbours,” says Pete D’Arruda, president of Capital Financial Advisory Group.
Forget the sidelines
Are you in the game, or sitting on the sidelines like a sissy? Far too many investors, including major corporations sat on excess cash in 2010. “There is nothing wrong with keeping assets in cash for emergencies, but cash, currently earning almost nothing is not a long-term investment strategy,” says Skeans.
Being too cautious — investing heavily in CDs, money market funds, treasuries and other bonds may make it easier to sleep at night, but these investments typically don’t keep up with inflation over the long term, points out Jonathan Gassman, director of Tax & Wealth Management at Gassman & Golodny.
Furthermore, many believe that bonds and bond funds are “safe”. However, says Matthew Tuttle, a certified financial planner with Tuttle Wealth Management, “Bonds and bond funds have been taking a beating lately and that should continue.”
Play to win.
Understand what you’re buying
Assets in U.S. listed exchange-traded funds (ETFs) and exchange-traded products recently surpassed the $1 trillion mark for the first time. Investors lost their minds over ETFs.
There are plenty of reasons: ETFs, which are kind of cousins to mutual funds, often have lower expense ratios compared to both active and passive mutual funds; they’re transparent, trade throughout the day, and because they typically avoid year-end capital gains distributions, they don’t monkey with your tax planning.
There’s also no minimum initial investment, unlike mutual funds.
While wildly popular, truth is, some folks don’t know what they’re buying as a growing number of ETFs have gotten ever exotic, such that the average Joe or Jane investor is likely out of his or her investing league.
Just because something is the subject of big-time buzz, if you can’t explain it to your friend in a sentence or two — what it is, how it works, or really understand the risks, leave it alone.
Be true to thyself
You failed to invest in yourself last year. It’s understandable. “Who has time to ensure their ‘human capital’ is keeping pace with their ‘investment capital’?” asks JJ Montanaro, a certified financial planner with USAA Financial Planning Services.
However, your ability to earn a living is one of your biggest assets, so it pays to honestly assess your “employability” and make prudent decisions about whether or not a new direction is needed. “If so, invest the time to make it happen,” he adds. In other words, next year, do what you need to do to be a workplace superstar.
The first month of the New Year is nearly history. Let go of the past, vow to learn from the mistakes and make 2011 all about smart money moves.
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