As we welcome the new year, I thought I would share six sensible investment resolutions published by Dimensional Funds that everyone can utilize:
1) I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor financial decisions. If necessary I will turn off CNBC and turn on ESPN or HGTV.
2) I will stop searching for tomorrow’s star money manager as there are no gurus. Capitalism will be my guru since capitalism provides a positive expected return on capital and it is there for the taking. For me to succeed, someone else does not have to fail.
3) I will not focus my portfolio in a few securities or even a few asset classes, as diversification remains the closest thing to a free lunch.
4) I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
5) I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
6) I will keep my cost of investing reasonable.
I’d like to recommend one other resolution to the list:
7) I will decide what is most important — beating an investment benchmark or meeting my financial goals. If my portfolio lags a benchmark but I obtained my goals, I will be content that I likely reduced my investment risk but still achieved what I hoped to accomplish.
Lastly, I’d like to repeat the thoughts of my associate, Ken Weingarten, CFP, who points out that most of us find it hard to follow a sensible diet or a sensible investment strategy 100% of the time. Just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can probably benefit from having a ‘financial coach’ to remind them about their resolutions and keep them on track toward a more prosperous future.