New Year’s resolutions are an annual ritual for many, with health-related resolutions being among the most common. In the spirit of the season, investors should consider making (and sticking to) New Year’s 2023 investing resolutions to lead healthier investing lives.
The following resolutions can reduce stress and improve investment performance:
“Activity bias” is a common behavioral pattern among investors who closely follow daily (or minute-by-minute) activity in the markets. Many investors would benefit from finding a healthier balance between being well-informed and being overly stimulated by market news.
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Investors who struggle to find this balance often trade more frequently than recommended, leading to negative performance and tax consequences.
Consuming less economic and political news can be a good resolution for those who gorge themselves on recent tweets, broadcasts and articles.
2. Spend less time in “echo chambers”.
Confirmation bias is the tendency to seek evidence that supports pre-existing beliefs and to interpret information in a way that supports an existing position. the echo chamber (opens in a new tab) just avoiding opposing views can lead to costly investment mistakes.
Finding opposing views is a necessary step in testing an investment view and an important (and perhaps uncomfortable) resolution for 2023.
3. Take an objective look at your portfolio.
The new year is a logical time to evaluate your current investments. Some recent winners may have benefited from a favorable market environment and may not be able to sustain their success. If recent success is not sustainable, it may be time to look for opportunities to turn the position into an investment with superior prospects.
The same analysis should be applied to the lowest performing positions. Assessing whether losing positions are likely to recover is a critical aspect of portfolio management. Often the recent laggards are the leaders of tomorrow. But some investments that seem cheap today can become much cheaper!
In a rapidly changing environment, it is important to be vigilant in order to win and lose investments.
4. Ask the right question(s).
Investment discussions in January are dominated by forecasts for the coming year. The most common question is: “What do you expect from the market this year?”
Although the natural impulse is to focus on the one-year outlook, for most investors focusing on a relatively short time horizon is counterproductive. Investors should start the year with a budget and investment allocation that takes into account known cash flow needs and a emergency reserve for unforeseen cash needs.
Beyond these short-term cash needs, the rest of the portfolio should be invested in accordance with long-term financial and personal goals. Good questions to ask integrate investments with financial planning goalsfocusing on long-term goals.
Realistically, once liquidity needs are met, most investors have time horizons measured in years or even decades.
The unreliable “crystal ball” for investment performance over one-year periods becomes more reliable over longer periods, making investment planning less stressful.
5. Read a book.
The final suggested resolution to start the year is: Read a book! There are several books that provide sound advice on how to be a more self-aware and effective investor.
Daniel Kahneman (opens in a new tab) received a Nobel Prize in 2002 for his discoveries that challenge the assumptions of human rationality prevalent in modern economic theory. by Kahneman Think, fast and slow summarizes decades of research and explains the thought patterns that influence decision-making.
Investor and Associate Professor at Columbia Business School Michael Mauboussin (opens in a new tab) has done considerable work on behavioral finance and on the evaluation of investment successes and failures. at Mauboussin The Success Equation: Unraveling Skill and Luck in Business, Sports and Investing provides insight into the roles that skill and luck can play in successful investments and how best to distinguish between the two.
Making New Year’s investment resolutions can increase the likelihood of long-term investment success. Staying on track with resolutions is easier said than done.
The likelihood of staying on track is higher for people who hold themselves accountable for their resolutions, so it can be helpful to put resolutions in writing and keep them somewhere visible as a constant reminder.
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